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The Maharaja Dilemma:
Can Pepsi Thrive in Sri Lanka?
On January 1st, 1997, Mano Wikramanayake, Group Director of the Maharaja Corporation,
relaxed in his “planter’s chair” having finally arrived home in Colombo, Sri Lanka. His butler
brought him a tambali and handed him a fax on Donaldson Lufkin & Jenrette (DLJ) letterhead.
Mano asked “is that all?” His butler wiggled his head in affirmation, adjusted his sarong and
shuffled away to prepare supper. After his non-stop road show in New York City, Mano had
expected a pile of faxes from interested groups looking to enter as 3rd party investors to the
existing Olé joint venture between Maharaja and Pepsi. “How could they be the only takers?” he
thought to himself. The Sri Lankan economy was on the rise; Pepsi’s brand awareness was
growing; and the Maharaja Organization had a strong track record of marketing and distributing
a variety of products in the country.
With only one fax in hand, Mano wondered about the fate of the joint venture. He knew the joint
venture was highly undercapitalized and that Pepsi was not going to invest any more equity in
the project. Feeling the heavy burden of all the high-interest rate domestic loans that had helped
the Maharaja’s support operations for the last two years, Mano pondered his alternatives. After
large capital investments in bottling equipment, distribution trucks, and warehouses, did it make
sense for the Maharaja’s to abandon the joint venture? If not, could they turn things around
without the help of a third party investor? What if the DLJ offer is the best they can get given the
political instability in Sri Lanka? These questions began to overwhelm Mano, so he decided to
call his Finance and Marketing VPs to discuss the DLJ offer.
Joint Venture Inception: Pepsi & Olé Spring Bottlers
In 1985, PepsiCo International became interested in distributing their carbonated products in Sri
Lanka and entered into a franchise agreement with Ceylon Cold Stores (CCS). Despite the
successful launch, frustration quickly settled in as Pepsi saw itself “white in the market”1 for
three straight years. Further complications arose from a labor dispute in 1988 which ultimately
1. “White in the Market” refers to containers in the market with no product.
Sanjay Pamnani, Heidi Pellerano, Dhanusha Sivajee and Vidhi Tambiah, MBAs 2004, prepared this case for class discussion
rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright © 2004 by Duke University, The Fuqua School of Business.
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forced the government to take over the management of the company under emergency
regulations. In 1990, Pepsi terminated the franchise agreement. At this time, Les Ham, President
of PepsiCo Asia, realized he needed to find a new franchise partner, otherwise, he would be left
with no other option but to pull out of the Sri Lankan market completely.
Ham turned to The Maharaja Corporation. As Sri Lanka’s largest privately-held corporation,
Maharaja was looking to expand its portfolio of international brands. In 1991, after lengthy
negotiations, Pepsi awarded the franchise to the Maharaja Corporation. Under the agreement
(Exhibit 1), Maharaja would serve as the exclusive Pepsi franchisee in Sri Lanka and would
begin by bottling and marketing 300ml glass bottles of the ‘Pepsi’, ‘Mirinda’, and ‘7-Up’ brands
for a term of five years. The joint venture was named after Maharaja’s existing “Olé Springs”
manufacturing facility which in 1992 was retrofitted into a bottling plant. The plant was located
on a 19.5 acre property, in the Eastern outskirts of Colombo. Initially, the plant employed 265
employees and had a capacity level of 480 bottles per minute (bpm)
In 1992, Pepsi was officially re-launched in Sri Lanka under the wardship of a PepsiCo regional
office in Pakistan. The Pakistani office supported the launch with an ad campaign featuring
model Claudia Schiffer drinking out of a can of Pepsi (Exhibit 2). The launch date which is
usually a day of celebration quickly became a day of concern for the Maharaja Corporation.
They sat in their offices wondering why the advertisement provided by Pepsi featured a can
when only bottles were sold in Sri Lanka. Additionally, the entire Pakistani team did not turn up
for the launch on account of a religious festival. Could this be a sign of things to come?
Unfortunately, the answer was “yes,” as the Pakistani team continued to demonstrate little
commitment to the joint venture. As a result, the venture struggled during the first three years of
operation reporting loses of SL Rupees 4.9 million, 0.9 million and 78 million. The operation
was highly undercapitalized, but the Maharaja Corporation was not willing to invest further
unless Pepsi was willing to do the same.
In 1995, Roger Enrico took over the reigns of PepsiCo Inc. Mr. Enrico was a brilliant marketer
who understood the importance of building truly global brands. In May, he infused the project
with a $2 million equity investment and moved wardship to PepsiCo India (Exhibit 3). With
PepsiCo’s renewed commitment to the venture and positive outlooks for the Sri Lankan
economy, the Maharaja Corporation saw an opportunity to turn this venture around. However,
the capital infusions didn’t prove to be sufficient. The Maharaja’s were saddled with highinterest debt and Pepsi’s market share had not grown as projected. Since Pepsi was not willing
to make any additional investments in the venture, it became clear that a third party investor was
the answer to their financial woes.
In December1996 as the Sri Lankan economy began to recover, Mano Wikramanayake, Group
Director of the Maharaja Corporation, flew to New York to pitch Olé to a group of potential
investors. He was looking to invoke interest in a private placement in Olé and received
favorable reviews from investors who were extremely bullish on Asian economies at that time.
Further he disclosed to investors, Olé’s plans to go public after two years first on the local stock
exchange and then in the US via an ADR offering which would allows investors an exit and an
opportunity to make an attractive return on their initial investment. After two weeks of
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meetings, Mano returned to Sri Lanka hopeful that Olé was going to receive the necessary capital
to restructure operations and begin to rival Pure Beverages and CCS for market share.
To Mano’s dismay, only one investor, Donaldson Lufkin & Jenrette (DLJ), a publicly held U.S.based investment bank and financial services provider, submitted a proposal. Highlights of
DLJ’s offer are shown in Exhibit 4. It was obvious from the offer that DLJ was concerned about
the various risks that could plague a project in an emerging market like Sri Lanka and wanted
substantial downside protection for its investment. However, were they asking for too much?
Where there other ways for the Maharaja’s to mitigate DLJ’s concerns?
Sri Lanka
Sri Lanka, (Exhibit 5), is an island off the southeast coast of India. It is approximately the size of
Ireland but with a population the size of Australia (19m). There are two main ethnic groups, the
Singhalese (Buddhist majority) and Tamils (Hindu minority). There are a number of other
important minorities such as Muslims, Chettiahs, Sindhis and Eurasian “Burghers”. Sri Lanka is
rich in natural resources. Its main industries include agriculture, mining and tourism.
Unfortunately, the island has never been able to fully exploit its resources because of the
devastating ethnic conflict that has raged since 1983. (Exhibit 6)
Ethnic Conflict
Sri Lanka was colonized in turn by the Portuguese, Dutch and the British. The British employed
their “divide and conquer” approach to administering the island. They found a minority of
Tamils and Singhalese open to Christian conversion. They gave the top administrative posts to
this Christian “elite” who enjoyed power and privilege over the Buddhist majority. After
independence in 1948, a Singhalese Christian government came to power and upheld rights for
all minorities. However, on the wave of a Buddhist backlash, a leading Christian Singhalese,
S.W.R.D Bandaranaike, converted to Buddhism and came to power promising to end nonBuddhist policies. A Buddhist monk later assassinated him because he was yielding too much to
his erstwhile Christian colleagues. Thus, consequent governments introduced even more policies
favoring the Buddhist majority at the expense of other minorities.
The Tamils started a peaceful struggle for their rights which lasted from the early 50’s to late
70’s. A new pro-Buddhist government in 1978 sidelined Tamil and other minority rights further
and introduced a new “executive presidency” that had the rights to dissolve parliament and effect
military control without recourse to the parliament. This government instigated yet more
policies to favour the majority. The Tamils reacted violently in the North of the country, killing
policemen and military personnel. Ethnic tensions rose to a peak in 1983 when an alleged
government-led riot was directed towards Tamils in Colombo and several other towns. Tamil
businesses and homes were razed. Tamils who could afford to flee the country sought refuge in
the UK, US, Canada and Australia. Others risked life and limb crammed on boats headed
towards India. Those Tamils left behind waged a guerilla style war led by Vellupillai Prabakaran
- “the Fox”. The Tamil Tigers as they became known soon became a highly disciplined and
effective guerilla group. Their “suicide bombings” quickly became a trademark. Assassinations
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attributed to them include Rajiv Gandhi (former Indian Prime Minister – for his decision to send
in the Indian Peacekeeping Force) and Ranasinghe Premadasa (President of Sri Lanka). The
government responded by incurring curfews and a high military presence in Colombo.
Exchange Rate and GDP
The Sri Lankan Rupee (SLR) is allowed to float against a basket of currencies with the US$ as
the intervention currency. The Central Bank maintains a 2% margin between daily buying and
selling rates, to guide commercial banks in quoting their rates. The value of the Rupee has
fluctuated since 1978, but the overall trend has been downwards, (Exhibit 7), reflecting the
persistent current-account deficit and relatively high inflation rates. (Exhibit 8)
In 1989, a rigorous liberalization program was introduced by Mr. Premadasa’s UNP government.
The economic reform programme was supported by an IMF Enhanced Structural Adjustment
Facility (ESAF). Stabilization measures included a devaluation of the Rupee and the abolition of
major subsidies. These were complemented by an ambitious privatization drive. Tax, tariff and
trade reforms were also instituted and the current account was freed of exchange controls. GDP
growth rose from 2.3% in 1989 to 6.9% in 1993. The People’s Alliance (PA) government
pledged itself to continue with the economic reform programme.
Since 1991, the share of industry (manufacturing, construction and utilities) has increased from
25.7% to 28.8% of real GDP. (Exhibit 9) In particular, manufacturing has emerged as the lead
sector underpinning economic growth. Progressive privatization of state enterprises has enabled
the private sector to dominate manufacturing. Small and medium enterprises account for nearly
90% of private industrial units. The services sector accounted for 48.7% of GDP in 1995 and is
principally composed of wholesale and retail trade, financial services, transport and
communications, public administration and defense and tourism. (Exhibit 10)
Monetary Policy
In recent years, monetary policy has focused principally on the control of inflation with the
Central Bank relying on indirect policy instruments including open market operations in
Treasury bills and Central Bank securities to influence the growth of monetary aggregates. In
1992-93 monetary growth was fuelled to a great extent by a large increase in foreign capital
inflows and an expansion in private-sector credit which necessitated the operation of a tight
monetary policy. (Exhibit 11) In 1993-95, an even stronger emphasis on controlling inflation led
to a tightening of monetary policy to compensate for high defense spending and a widening
fiscal deficit.
High inflation has been a persistent problem in Sri Lanka over the past decade. (Exhibit 8) Costpush factors such as wage adjustments, increases in indirect taxes, high interest rates and
exchange rate depreciation have contributed to increases in the price level. (Exhibit 12) Seasonal
scarcities of agricultural commodities and inefficient agricultural production have also been
responsible. In recent years, the principal causes of demand-induced inflationary pressures have
been the high level of government spending and the rapid rate of monetary expansion. In 1988-
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93 annual average inflation was 13.6%. It was suppressed artificially to 8.4% in 1993 and to
7.7% in 1994 by a combination of subsidies and reductions in key administered prices.
Persistently high inflation has prevented any real increase in incomes since wage increases have
generally not kept pace with the rise in prices. There are no reliable statistics for income
distribution, but anecdotal evidence suggests a marked deterioration in income disparities. Thus,
many industries have been adversely affected by strikes initiated by labor/trade union forces
seeking to remedy this malady. (Exhibit 13) Rising food prices have also prevented any
significant rise in discretionary spending with more than 85% of incomes being spent on basic
necessities.
Since the average rate of inflation in Sri Lanka has tended to be higher than those of its
competitors, the country’s export price competitiveness has suffered. This problem has been
exacerbated by high interest rates and the lack of sources of concessionary financing to the
export sector. Since exchange rate depreciation also fuels inflation, the government has been
reluctant to devalue the currency to the extent exporters are demanding.
Maharaja Corporation
The Maharaja Group is Sri Lanka’s largest conglomerate in terms of sales with an annual
turnover of US $ 175 million for the year ended March 31, 1996. The two founding members
Mr. S Mahadevan and Mr. S Rajandram had worked for an American firm called Dodge &
Seymore Ltd which held agencies in Sri Lanka for prominent companies such as Union Carbide
Limited, Colgate Palmolive Limited, Yale & Towne Limited, Champion Spark Plugs Limited,
Parker Pen Limited and Cheeseborough-Pond’s Inc. At the time of World War II, Dodge &
Seymore closed their office in Sri Lanka (then known as Ceylon) and handed over the agencies
to Messrs S Mahadevan and S Rajandram.
At the inception, the agencies were serviced on an indirect basis however gradually through time
the distribution reach extended beyond the capital city of Colombo to other parts of the country.
This effectively laid the foundations for a formidable sales network that was leveraged in later
years to introduce products from other agencies and joint ventures.
The Maharaja Organization was incorporated in 1967 though a merger between the various
subsidiaries – Rajadrams Limited, Maharaja Distributors Limited and A.F. Jones & Co. Limited.
Since 1967 the Maharaja Group has been run by Messrs R Maharaja and R Rajamahendran
jointly as Managing Directors
In 1997, the Group’s operations remained highly diversified with interests in imports, local
manufacturing, distribution and marketing, export commodity trading, tourism, clearing and
forwarding, project development, computer services, soft drink bottling, television and radio
broadcasting, satellite communications, beauty care, a flying school and a domestic air service.
One of the Group’s most successful joint ventures was with the New Zealand Dairy Board that
manufactures and markets milk and milk products in Sri Lanka under the ‘Anchor’ Brand name.
The Maharaja Group’s excellent distribution network has made it a household name in a
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predominantly rural country and its marketing track record made the company the top choice of
partners in joint ventures in the Sri Lankan market. Furthermore, the Group was also able to
utilize its ownership and presence in media operations to promote its joint venture and marketing
operations.
PepsiCo International (Exhibit 14)
The carbonated soft drink market had, in recent years become increasingly competitive as
Western markets matured and multinational firms began increasing global operations as a means
of continued growth. Historically, the early mover into a “white market” (an area with no
previous distribution of Coke or Pepsi) continued to hold the majority market share as the market
matured. Thus, it was seen as critical to enter new markets as soon as they became politically and
economically accessible.
Instead of going head-to-head with Coke in almost every market in the world, Pepsi had focused
its efforts on high-potential emerging markets such as China, India, Russia and Vietnam. These
countries had high populations and low soft drink consumption rates, which translated into
tremendous growth prospects. (Exhibit 15) Pepsi’s strategy was to capitalize on this growth by
leveraging its already strong market position (at least 20% market share) in these markets.
(Exhibit 16)
By 1997, PepsiCo was selling about three billion 8-oz cases of soft drinks outside North America
under a different set of brands that included Seven-Up, Mirinda (orange soda) and Pepsi Max (no
calorie cola). About 60% of Pepsi’s international volume was sold by independent bottlers,
while the remaining 40% was handled by bottlers in which PepsiCo either controlled or had
some equity stake.
In evaluating the merits of entering a new market or making a major investment in reviving an
old one, PepsiCo looked for a 14% internal rate of return, after adjusting for expected inflation
and country risk, over a 12-year horizon. PepsiCo also measured the success of an investment
against a 7% corporate ROA target. These criteria where then supplemented with a fivefold
characterization of investment opportunities:
 Big developed soft drink markets;
 Smaller or riskier markets;
 Opportunities to invest in jump-starting channels or segments within the first two
categories;
 21st century markets; and
 Turnaround opportunities as the bottler of last resort.
PepsiCo had categorized Sri Lanka in the second of these five categories. It looked at Sri Lanka
as a natural extension of its investment in India, which it categorized as a twenty-first century
market. However, they could not ignore the inherent limits on size of population and growth
plus the risks that Sri Lanka bore as a country engaged in civil war. From Pepsi’s perspective, it
was critically important for Olé to capture market share. Revenue from the sale of bottles was a
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secondary concern for Pepsi, especially as its returns would be largely generated by the sales of
concentrate to Olé.
The Soft Drink Industry
The soft drink industry is composed of four key players: franchise companies, bottlers, retailers
and consumers. Franchise companies are the owners of the brands. They manufacture the soft
drink concentrate and market the brands. The franchisers business enjoys high gross margins of
close to 80%. Their biggest expenses come from marketing, advertising, promotion, market
research and managing their network of bottlers. The bottlers purchase the concentrate, mix it
with sweeteners, and carbonated water, package and distribute the finished product and promote
the products locally. (Exhibit 17) The bottler’s business is very capital intensive needing
specialized-high speed equipment, distribution trucks, warehouses and info management
systems. The bottler’s gross margins are much lower, typically in the 15-45% range. Bottlers
ultimately have the choice on how the product is presented to the market. In emerging markets
like Sri Lanka, bottlers prefer to package their products in glass bottles because with the lower
price points, the reusable package format is more affordable as opposed to the disposable
aluminum cans.
The Sri Lankan Soft Drink Market
Although accurate information about the Sri Lankan carbonated soft drink market is difficult to
obtain due to the absence of a tracking agency, total consumption is estimated to be at around
16.5 million cases per year and projected to grow to approximately 20 million cases per year by
2004. Sri Lanka’s per capita soft drink consumption is one of the highest in the region (22
servings) beating out India (5) and Pakistan (13). However, soft drink consumption is only onethird of the beverage market as non-carbonated drinks like lemon/lime and orange continue to be
the big sellers. The market is highly seasonal with a 30%-40% drop in sales during winter and
summer monsoon months and highly dependent on tourism. Industry experts project that the
carbonated soft drink market will grow at 7% annually in the foreseeable future.
The carbonated soft drinks market is dominated by three major players – the local Elephant
House brand owned by John Keells and managed by Ceylon Cold Stores, Coke distributed and
marketed by Pure Beverages, and Pepsi distributed and marketed by the Maharaja Group. The
Elephant House brand leads with a market share estimated to be 45% followed by Coke and
Pepsi with 42% and 15% share respectively. (Exhibit 18)
In the early 1980’s, the Sri Lanka soft drink market was controlled by the government under a
“competent authority” arrangement. However, despite the lack of competition and a captive
market, the business was poorly run. In 1982, the government-run agency was restructured and
renamed Ceylon Cold Stores (CCS). CCS was later purchased by the John Keells Holdings
(JKH) Group in 1991. CCS number one asset is - the “Elephant House Brand” of soft drinks
which has been around since the 19th century. CCS has predominantly focused on product
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segments where its competitors are relatively weak or do not have a comparable drink like fruit
flavored soft drinks sold under the Elephant House Brand. Currently, there are five different
fruit flavors, which account for 65% of revenues. Its plum flavored soft drink ‘Necto’ enjoys
strong consumer preference - especially since there is no comparable product in the market.
CCS has traditionally placed greater emphasis on pricing and offers the CCS 400ml bottle for the
same price as 300ml bottles of Pepsi and Coke. This large size allows the drink to be shared by
two consumers effectively halving the price per consumer in a highly price conscious market.
The Elephant House brand has great recall, the Singhalese words “Aliya Beanna” (meaning
Elephant Brand) are the colloquial term for a soft drink. Furthermore, the brand commands a
high premium among distributors and retailers who willingly pay in cash for all purchases.
Thus, John Keells has had zero defaults while its competitors have suffered from substantial bad
debt problems.
Coke entered Sri Lanka in the early 1960s by granting a bottling franchise to the Pure Beverage
Company, a local Sri Lankan bottler. Pure Beverage was authorized to distribute and market
Coca Cola, Sprite and Fanta. Coke could not make much headway in the market until the late
1970s. At that time, the Elephant House was having severe management problems and the
economy had begun to open up. With the introduction of television, Coke was able to capture
the imagination of the Sri Lankan consumers through attractive advertising campaigns. Behind a
strong advertising push, Coke was able to overtake Elephant House in the early 80’s. By 1991,
prior to John Keells taking over CCS, Coke had captured nearly 70% of the market. In response
to Coke’s advertising, CCS moved into more aggressive advertising aimed at specific market
niches which placed more emphasis on the taste preferences of consumers. In December 1996,
Pure Beverage’s Kaduwela plant was shut down for almost four months due to labor problems.
This resulted in severe supply problems leading to an 8% fall in Coke’s market share to 42%.
CCS capitalized on Coke’s problems and increased its market share by 6% to 46%. Although it
has been present in the market for more than three decades, Coke has never been able to sustain a
sizable market share like it has in other international markets. The main reason for this disparity
was the step-motherly treatment towards the Sri Lankan market from Coke’s South Asian
headquarters which oversaw operations in Sri Lanka.
Olé Performance
Olé had shown poor results from its inception and was yet to make a profit. Exhibit 19 shows the
capital infusion schedule which was required to keep the business reasonably capitalized. A lot
of the initial demands arose from the need to put an effective distribution system in place that
could not only distribute the product but also collect the empty glass bottles for re-use.
Additionally the initial production of glass bottles, purchase of distribution equipment and
acquisition of coolers (given free of charge to retailers) necessitated heavy capital expenditure.
However the main contributor to the negative bottom line was the high operating cost which was
being gradually reeled in. After the initial years where the Maharaja’s had learnt the ins and outs
of the soft drinks business, the manufacturing and distribution operations had started to run more
efficiently. Just then that a series of militant attacks bought a crisis in Sri Lanka resulting in
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tourists, substantial consumers of cold drinks in Sri Lanka, stayed away from the country. This
largely contributed to another loss making year, the fourth in a row, at Olé.
The next year a peace was restored and Olé’s prospects once again looked bright. The Sri Lanka
economy was once on the upswing and the Maharajas got ready for a massive campaign to win
market share from their competitors. They realized this would require a fresh dose of capital
injection into the venture. Already saddled with a heavy and expensive debt load, the only viable
alternative was equity infusion. Although the firm’s projections looked very attractive (Exhibit
20 & 21), both the Maharajas and Pepsi were hesitant to add to their sizeable equity stake. Both
sides however felt that given the buoyant market conditions, there would be plenty of thirsty
investors who would be willing to “guzzle down” the risk.
Maharaja Dilemma
Given the competitive landscape and the current political and economic environment in Sri
Lanka, it was evident that Mano was facing a tough decision in terms of securing an outside
investor in the Olé joint venture. He was fast running out of time and capital but remained
unclear as to the attractiveness and feasibility of the DLJ proposal. Could he negotiate a better
deal or was he at the mercy of DLJ offer and the ambigious put option clause?
As Mano finished up his tambali, he pondered the best approach to resolving Maharaja’s
dilemma. An NPV valuation from the perspective of a third-party investor seemed liked an
interesting analysis but how would he estimate cash flows and the all important discount rate?
Mano put down his glass and started to call his trusted Marketing and Finance VP’s.
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Exhibit 1: Summary of Agreement between PepsiCo International and The Maharaja Corporation
PepsiCo, Inc. entered into three agreements with the Company (Olé) in 1992 allowing to exclusively
market ‘Pepsi’, ‘Mirinda’ and ‘7-Up’ soft drinks. These agreements are valid for a term of five years
(1997) and can be automatically extended for one additional period of five years (2002) so long as the
Company is not in default of any of its obligations.
These agreements also provide for: (i) the allocation of advertising expenses and (ii) the cost of the
concentrate that the Company purchases from PepsiCo, Inc.
As part of the exclusive bottling agreements between the Company and PepsiCo, Inc. in respect of
‘Pepsi’, ‘Mirinda’, and ‘7-Up’ brands, PepsiCo, Inc. has agreed, subject to the terms and conditions
contained therein, to pay 100% of the marketing costs in 1993, 80% in 1994, 60% in 1995, 45% in 1996
and 30% in 1997 with the balance paid by the Company. Thereafter, the 30% continues to be paid by
PepsiCo.
In line with policy, PepsiCo, Inc appoints a Country Manager in Sri Lanka who is responsible for the
marketing of the PepsiCo, Inc. brands. Additionally, he is in charge of developing and maintaining all
operating procedures to ensure that the Company meets PepsiCo, Inc.’s standards
Exhibit 2: Pepsi Re-Launch Supporting Advertising
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Exhibit 3: Olé Capital Structure
1992
20%
Debt
80%
Equity
1996
65%
35%
Debt
Equity
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Exhibit 4: DLJ’s Proposal
DLJ’s proposal was to invest US $3 million in exchange for 17,460,000 convertible preference
shares of Ole Spring Bottlers at par value of SL Rupees 10 each. In addition to the shares, DLJ
would also receive a Put Option that was guaranteed for execution by both the Maharaja Group
and Pepsi. The Put Option when exercised allowed for a 10% annually compounded US Dollar
return on DLJ’s initial investment and had two exercise periods – the first at the end of three
years and second at the end of four years from the share purchase agreement. DLJ purpose of
investing in Ole was to finance it intermittently before its stake could be liquidated either
through another private placement or sale after an IPO. As an investment bank DLJ was well
connected to offer its stake to other investors in a private placement sale or help take the Ole
public if market conditions were suitable. However in case Ole’s performance was below
expectations due to any reason, DLJ had put into place a safety net for itself in the form of the
put option agreement.
Exhibit 5: Sri Lanka
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Exhibit 6: Impact of Ethnic Conflict in Market Performance
Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997
Exhibit 7: Rupee Exchange Rate
Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997
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Exhibit 8: Sri Lanka’s Inflation Rate
Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997
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Exhibit 9: Sri Lanka’s Economic Indicators
Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997
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Exhibit 10: Tourism
Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997
Exhibit 11: Foreign Investment
Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997
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Exhibit 12: Interest Rates
Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997
Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997
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Exhibit 13: Impact of Strikes on Productivity
Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997
Exhibit 14: PepsiCo International
MORGAN STANLEY DEAN WITTER, August 4, 1997, PepsiCo (PEP):The Face of PepsiCo Is Changing
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Exhibit 15: Per-Capita Soft Drink Consumption
MORGAN STANLEY DEAN WITTER, August 4, 1997, Global Soft Drink Bottling Review and Outlook:
Consolidating the Way to a Stronger Bottling Network
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Exhibit 16: PepsiCo Market Share Advantage
MORGAN STANLEY DEAN WITTER, August 4, 1997, Global Soft Drink Bottling Review and Outlook:
Consolidating the Way to a Stronger Bottling Network
Exhibit 17: Olé’s Cost Breakdown
The major ingredients used in the production of the Company’s (Olé) soft drink products include
water which comes from the plant’s own wells; sugar which is supplied from several suppliers in
Sri Lanka; concentrates which are supplied by PepsiCo, Inc. under license and Bush, Boake
Allen; carbon dioxide which is supplied from Ceylon Oxygen under contract in Sri Lanka; bottle
washing and water treatment chemicals such as caustic soda, the majority of which are sourced
within Sri Lanka from several suppliers; crowns which are supplied from two suppliers in Sri
Lanka; glass bottles which are currently sourced from three suppliers in India.
Cost breakdown per unit of soft drinks is as follows:
Direct Cost
49.9%
Manufacturing Cost
2.9%
Excise Duty
4.3%
Sales & Distribution
20.0%
General & Administration
2.5%
Administration & Marketing
5.9%
Operating Margin
15.4%
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Exhibit 18: Market Shares by Competitor
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1950,s
1960 to 1978
1978 to 1985
CCS (Elephant House)
1985 to 1987
1987 to 1991
Pure Beverages (Coke)
1992-1995
1995-1997
The Maharaja (Pepsi)
21
233-100
The Maharaja Dilemma
Exhibit 19: Share Capital Schedule
SHARE CAPITAL SCHEDULE FOR OLE SPRING BOTTLERS
Equity Infusion 1991-92
Company
Beverage Holdings Limited
Stadebroke Investments Private Limited
Jones Overseas Limited
The Maharaja Organisation Limited
The Maharaja Organisation Limited
Date
Jan-92
Aug-91
Aug-91
Jul-91
Aug-91
1991 Total
Equity Infusion 1992-93
Company
The Maharaja Organisation Limited
Equity Infusion 1994-95
Company
Beverage Holdings Limited
Beverage Holdings Limited
Dawson Capital Limited
Stadebroke Investments Private Limited
Jones Overseas Limited
The Maharaja Organisation Limited
Apr-94
Nov-94
Nov-94
Nov-94
Nov-94
Nov-94
Equity Infusion 1995-96
Company
Seven Up Nederlands BV
Date
Jun-95
Jan-00
Jan-00
Nov-93
Jan-94
Jan-93
257,950,840
1995-96
99,179,740
5,222,800
1995 Total
Date
1994-95
2,436,880
125,022,980
27,161,130
32,935,750
50,157,390
20,236,710
33,608,430
1992-93
Mar-93
5,222,800
1993 Total
1993-94
16,641,410
14,280,000
24,324,920
12,760,000
13,000,000
Equity Infusion 1996-97
Company
Beverage Holdings Limited
Date
Dec-96
1996 Total
99,179,740
1996-97
199,134,000
199,134,000
81,006,330
Total Equity Infusion 1991-96
Maharaja Group owned entities
Beverage Holdings Limited
The Maharaja Organisation Limited
Dawson Capital Limited
Date
1994 Total
Date
1992 Total
Equity Infusion 1993-94
Company
Beverage Holdings Limited
Beverage Holdings Limited
Beverage Holdings Limited
Stadebroke Investments Private Limited
Dawson Capital Limited
1991-92
2,146,300
3,000,000
24,000,000
2,062,130
2,400,000
Figures in SL Rupees
676,102,140
PepsiCo Inc. owned entities
Stadebroke Investments Private Limited
Jones Overseas Limited
Seven Up Nederlands BV
22
233-100
The Maharaja Dilemma
Exhibit 19: Ole Pro forma Income Statement
OLE SPRINGS PROFORMA INCOME STATEMENT
Revenue Calculation
Total CSD Market - 8oz cases
Market share growth
OLE Springs share
18.0%
1998
15,660
8.0%
19.2%
1999
16,874
7.8%
20.4%
2000
18,139
7.5%
21.6%
2001
19,454
7.3%
22.8%
2002
20,816
7.0%
24.0%
2003
22,221
6.8%
25.2%
2004
23,666
6.5%
26.4%
2005
25,145
6.3%
27.6%
2,610
3,007
3,442
3,918
4,436
4,996
5,600
6,248
6,940
7,67
Pepsi flavour share
PCI flavours 8 oz cases
93.0%
2,427
90.8%
2,729
88.5%
3,046
86.3%
3,379
84.0%
3,726
81.8%
4,084
79.5%
4,452
77.3%
4,826
75.0%
5,205
72.8%
5,584
OLE flavour share
OLE flavours 8 oz cases
7.0%
183
9.2%
278
11.5%
396
13.8%
539
16.0%
710
18.3%
912
20.5%
1,148
22.8%
1,421
25.0%
1,735
27.3%
2,092
158
146
170
155
183
166
196
176
211
188
227
200
244
213
262
227
282
242
30
25
1997
383,513
26,674
410,188
1998
463,452
43,245
506,698
1999
556,233
65,552
621,785
2000
663,304
95,011
758,316
2001
786,176
133,297
919,473
2002
926,397
182,378
1,108,775
2003
1,085,530
244,552
1,330,083
2004
1,265,129
322,479
1,587,608
2005
1,466,696
419,222
1,885,918
2006
1,691,64
538,28
2,229,92
PCI - Contribution
OLE - Contribution
Total Contribution
176,416
14,404
190,820
220,140
24,304
244,444
272,554
38,152
310,706
333,310
56,722
390,032
402,915
80,911
483,827
484,042
111,616
595,658
578,045
149,666
727,711
673,681
197,357
871,038
781,016
256,564
1,037,579
900,80
329,42
1,230,23
Other Expenses
Manufacturing
Administrative
Selling & Distribution
Advertising - PCI brands
Trade schemes - PCI brands
Total Expenses
61,528
11,485
32,815
28,713
6,153
140,694
70,938
14,188
38,002
36,736
6,334
166,197
80,832
17,410
43,525
46,634
6,218
194,619
90,998
21,233
49,291
54,978
7,583
224,082
110,337
25,745
59,766
64,363
9,195
269,406
133,053
31,046
72,070
77,614
11,088
324,871
159,610
37,242
86,455
93,106
13,301
389,714
190,513
44,453
103,195
111,133
15,876
465,169
226,310
52,806
122,585
132,014
18,859
552,574
267,59
62,43
144,94
156,09
22,29
653,36
Earnings before Interest & Tax
EBITDA
50,126
105,126
78,247
143,147
116,087
191,997
165,950
253,979
214,421
315,641
270,787
386,194
337,997
468,458
405,869
552,064
485,005
647,355
576,86
755,44
Less Interest
Less Tax (after NOLs)
Net Profit
Net Profit US $
42,000
49,660
58,213
67,670
78,019
89,220
101,196
8,126
$143
28,587
$464
57,874
$865
98,280
$1,354
136,402
$1,732
181,567
$2,125
236,801
$2,554
Total 8 oz cases sold
PCI average net price
OLE average net price
INCOME STATEMENT
PCI - Net Sales
OLE - Net Sales
Total Sales
1997
14,500
figures in 000's SL Rupees
113,827
87,613
204,429
$2,032
126,945
107,418
250,642
$2,296
23
2006
26,65
6.0%
28.8%
140,323
130,961
305,576
$2,580
233-100
The Maharaja Dilemma
Exhibit 20 cont’d: Ole Pro forma Income Statement
PROFORMA INCOME STATEMENT - KEY DRIVERS AND ASSUMPTIONS
Growth Rates
Change in PCI Contribution ratio
PCI - Contribution ratio
Change in OLE Contribution ratio
OLE - Contribution ratio
Other Expense as % of revenues
Change in manufacturing exp
Manufacturing
Administrative
Change in selling & Distribution exp
Selling & Distribution
Change in Advertising
Advertising - PCI brands
Change in trade schemes
Trade schemes - PCI brands
1997
1998
1999
2000
2003
2004
2005
2006
1.50%
49.00%
2.00%
58.20%
1.25%
50.25%
1.50%
59.70%
1.00%
51.25%
1.00%
60.70%
1.00%
52.25%
0.50%
61.20%
1.00%
53.25%
0.00%
61.20%
0.00%
53.25%
0.00%
61.20%
0.00%
53.25%
0.00%
61.20%
0.00%
53.25%
0.00%
61.20%
1.50%
-1.00%
14.00%
2.80%
-0.50%
7.50%
0.25%
7.25%
0.25%
1.25%
-1.00%
13.00%
2.80%
-0.50%
7.00%
0.25%
7.50%
0.25%
1.00%
-1.00%
12.00%
2.80%
-0.50%
6.50%
-0.25%
7.25%
0.00%
1.00%
0.00%
12.00%
2.80%
0.00%
6.50%
-0.25%
7.00%
0.00%
1.00%
0.00%
12.00%
2.80%
0.00%
6.50%
0.00%
7.00%
0.00%
1.00%
0.00%
12.00%
2.80%
0.00%
6.50%
0.00%
7.00%
0.00%
1.00%
0.00%
12.00%
2.80%
0.00%
6.50%
0.00%
7.00%
0.00%
1.00%
0.00%
12.00%
2.80%
0.00%
6.50%
0.00%
7.00%
0.00%
1.00%
0.00%
12.00%
2.80%
0.00%
6.50%
0.00%
7.00%
0.00%
1.00%
2.5x
2.88x
3.3x
3.75x
4.05x
4.33x
4.63x
4.85x
5.1x
5.38x
54.00%
15.00%
2.80%
8.00%
7.00%
Debt Schedule
1997
1998
1999
2000
LONG-TERM DEBT
Beginning Balance
Increase during the year
Ending Balance
112,825
78,738
191,563
191,563
34,937
226,500
226,500
39,010
265,510
265,510
43,134
308,644
Tax Rate
2002
1.50%
47.50%
2.20%
56.20%
46.00%
Debt Service Coverage
Interest payment
Interest rate
Long-term Debt as a % of Revenues
2001
42,000
22%
46.7%
49,660
22%
44.7%
58,213
22%
42.7%
67,670
22%
40.7%
2001
308,644
47,204
355,847
78,019
22%
38.7%
2002
355,847
51,087
406,934
89,220
22%
36.7%
2003
2004
2005
2006
406,934
54,621
461,555
461,555
57,612
519,167
519,167
59,833
579,000
579,000
61,017
640,016
101,196
22%
34.7%
113,827
22%
32.7%
126,945
22%
30.7%
140,323
22%
28.7%
30%
24
233-100
The Maharaja Dilemma
Exhibit 21: Ole Pro forma Free Cash Flow Projections
OLE SPRINGS PROJECTED FREE CASH FLOW STATEMENT
APV Method
Cash Flow from Operations
Add Cash Interest paid
Less Interest Tax Shield
Capex
Free Cash Flows
Free Cash Flows (US $)
1997
146,818
42,000
(12,600)
(67,000)
1998
78,247
49,660
(14,898)
(78,710)
1
109,218
$1,922
2
34,299
$556
1999
2000
116,087 165,950
58,213 67,670
(17,464) (20,301)
(91,614) (105,664)
3
65,222
$975
4
107,655
$1,483
figures in 000's SL Rupees
2001
214,421
78,019
(23,406)
(120,764)
2002
270,787
89,220
(26,766)
(136,756)
2003
2004
2005
337,997 405,869 485,005
101,196 113,827 126,945
(30,359) (34,148) (38,084)
(153,412) (170,414) (187,347)
2006
576,861
140,323
(42,097)
(203,681)
5
148,271
$1,883
6
196,485
$2,299
7
255,422
$2,755
10
471,406
$3,980
8
315,135
$3,132
9
386,520
$3,541
25
233-100
The Maharaja Dilemma
References
Conway, Andrew J., Massot, Sylvain, Serra, Lore, Dormer Jim, and Mayo, Scott, “Global Soft Drink
Bottling Review and Outlook: Consolidating the Way to a stronger Bottling Network,” Morgan
Stanley Dean Witter, August 4, 1998.
Conway, Andrew J., “PepsiCo: The Face of PepsiCo is Changing,” Morgan Stanley Dean Witter, August
7, 1997.
Ghemawat, Pankaj “Pepsi: The Indian Challenge,” Harvard Business School, Case # 9-793-060, March
28, 1995.
“PepsiCo,” Brown Brothers Harriman & Co., May 22, 1997.
“Private Invitation to Subscribe for 40,000,000 Ordinary A Shares of Rs. 10.00 each at a price of Rs.
10.00 per share,” Olé Springs Bottlers Limited Private Placement.
“Put Option Agreement,” July 30, 1997.
“Share Holders’ Agreement,” July 30, 1997.
“Share Purchase Agreement,” July 30, 1997.
Solomon, Jennifer F., “PepsiCo — Preparing to Visit Roger’s Neighborhood,” Salomon Brothers, May
29, 1997.
“Sri Lanka Country Report,” Economic Intelligence Unit, May 1996
“Sri Lanka Country Report,” Economic Intelligence Unit, October 1996
“Sri Lanka Food & Beverage Sector: Ceylon Cold Stores,” Indosuez W.I. Carr Securities, February 11,
1998.
“Sri Lanka Strategy Bargain Buy,” Indosuez W.I. Carr Securities, December 1997.
“Sri Lanka Weekly No. 21,” Indosuez W.I. Carr Securities, May 1997.
“Subsidiary Guaranty,” July 30, 1997.
Yuan, Peter and Crum, Geoff “PepsiCo Changchun Joint Venture: Capital Expenditure Analysis,”
Richard Ivey School of Business, Case# 900N16, January 19, 2001.
26
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The Maharaja Dilemma
Interviews:
1. Srilal Ahangama, Finance Director, The Maharaja Company
2. Mano Wikramanayake, Group Director, The Maharaja Corporation
3. Nadija Tambiah, John Keells Holdings Group
4. Laksiri Wickramage, John Keells Holdings Group
27