Goldman Sachs and the Bhartia family, headed by Jubilant Group members Shyam and Hari Bhartia, are in advanced talks to co-invest in a 40% share in Hindustan Coca-Cola Beverages (HCCB). According to a report, this acquisition would gain a sizable portion in Coca-Cola's wholly-owned bottling operation in India, the company's fifth-largest global market.

Goldman Sachs will use a Special Purpose Vehicle (SPV) to finance the transaction, contributing between Rs 3,000 and Rs 3,500 crore through a convertible preferred stock structure. According to the article, the Bhartia family is anticipated to make a comparable contribution to the purchase.

Through its Goldman Sachs Alternatives division, which includes growth and private equity, hedge fund, real estate, and private credit investments, the Wall Street firm will direct its investment.

Terms of the deal and the exit plan

In order to provide some downside protection, Goldman Sachs has agreed to a 20% internal rate of return (IRR) cap on returns. The mandatory convertible preference shares included in the investment structure are meant to be converted at HCCB's anticipated initial public offering (IPO) in the upcoming two to three years. According to the article, Goldman Sachs would be positioned between the debt and the Bhartia family equity shares, and the IPO will include a waterfall repayment structure that prioritizes senior secured lenders.

The asset-light strategy of Coca-Cola

Coca-Cola India intends to sell its HCCB investment in order to generate value, following PepsiCo's asset-light business strategy. The transaction might help determine HCCB's worth and act as a prelude to the IPO. According to a report by The Economic Times, Varun Beverages saw a significant increase in market value after PepsiCo transferred its bottling operations to Varun.

Financial performance of HCCB

Hindustan Coca-Cola Beverages recently announced a net profit rise of 247 percent year over year, along with a 9.2 percent increase in revenue to Rs 14,021 crore for FY24. A $1.5 billion capital investment spread over five years is part of the company's growth plans to increase bottling capacities and construct new facilities in Gujarat and Madhya Pradesh.

Balancing Equity and Debt

Despite the enormity of this investment, the Bhartia family intends to avoid excessive leverage by raising Rs 3,000-Rs 3,500 crore in debt through mutual funds, which provide lower-cost financing than typical bank loans. Initially, the family considered possibilities from several asset managers and foreign banks, but ultimately chose a long-term partner over short-term mezzanine capital.