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Pepsi acquisition plans caught in sell-off bind

Partha Ghosh in New Delhi

Pepsi's plans to acquire part of its franchisee-owned bottling operations in India would trigger a divestment clause, which the government had imposed on the company in 1998.

The beverage major will now divest 49 per cent of its shareholding in Aradhana Softdrinks Company, the group firm, which has acquired franchise operations in Haryana and Himachal Pradesh, within the next five years.

A similar condition was imposed on Coca-Cola India in 1997, which the company was required to fulfill, after successive extensions, by February 2003.

Coca-Cola has already divested part of its equity in employees' trusts and is roping in strategic investors for the balance shares. The government had rejected the plea for a waiver.

In the case of Pepsi, the divestment clause was imposed in 1998. The clause required Pepsi to fulfill a divestment condition if it acquired any or more of its franchisees.

The condition was imposed in the backdrop of the 1997 agreement with Coca-Cola. Since Pepsi had not proposed to acquire franchisees as in the case of Coca-Cola, the condition was imposed on it with prospective effect.

Pepsi has already inked a deal with the Kewal Dhillon-promoted Dhillon Kool Drinks, to acquire his Haryana and Himachal Pradesh businesses with only one unit in Panipat.

The company has approached the Foreign Investment Promotion Board, seeking approval for the acquisition.

Sources said Pepsi was also negotiating with several of its other bottlers, including the Jaipurias, for acquiring their plants.

A company spokesperson, however, said Dhillon's was a unique case, because the bottler wanted to focus only on the booming Punjab market.

Dhillon's area of operations was spread over Punjab, Haryana and Himachal Pradesh.

"As a single franchisee was servicing a large area encompassing three states, there was need to utilise the available resources in a more judicious way. Hence, Pepsi proposed to engage in bottling operations in Haryana and Himachal Pradesh. Dhillon will concentrate on the strong Punjab market," the spokesman told Business Standard.

However, as per the divestment condition, Pepsi will divest 49 per cent stake in the company.

The Pepsi spokesperson said the company was willing to fulfill the condition of the government.

"Since we had agreed to such a condition, we will divest stake in Aradhana Softdrinks Company within the next five years as is required," he said.

Aradhana is currently a wholly owned subsidiary of Pepsi in India. Pepsi has 40 units in the country.

The bottling operations and marketing territories are divided among franchisees and the company.

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