Coca-Cola (NYSE:KO) recently acquired a 40% stake in Nigerian juice and snack maker Chi Limited from TGI (Tropical General Investments) Group. The terms of the deal were not disclosed, but an industry source told The Wall Street Journal that Coca-Cola will pay nearly $400 million.
Coca-Cola declares that the "agreement creates a strategic relationship between two beverage industry leaders" to serve "Nigeria's most popular sparkling soft drinks, juices, value-added dairy and water beverage brands." Coca-Cola also stated that it "intends to increase ownership to 100% within three years, subject to regulatory approvals while working on other long-term commercial structures."
Coca-Cola controlled 45% of the soda market in the Middle East and Africa last year, but just 3.5% of the region's fragmented juice market. The deal with TGI, the second-largest juice maker in the region, could boost that figure into the double digits and diversify Coca-Cola's business away from sugary sodas.
Expanding deeper into Africa
To offset sluggish growth in developed markets, Coca-Cola previously announced that it would boost its investments in Africa to $17 billion between 2010 to 2020, which would be roughly three times the amount invested in the last decade. Coca-Cola says that those investments will be spent on new manufacturing lines, distribution capabilities, cold drink equipment, and safe water access programs.
Kevin Balogun, president of Coca-Cola Central, East, and West Africa, stated that Coca-Cola has been investing in Nigeria for more than 60 years, and that the deal "represents the latest significant step in our commitment to growing our business and providing trusted beverage brands for Nigerian consumers and communities."
Coca-Cola isn't the only soda maker to expand into Africa. Over the past few years, PepsiCo (NYSE:PEP) has opened new plants in Kenya, Egypt, and other countries across the region to keep Coca-Cola's growth in check.
How much does this deal matter?
Last quarter, Coca-Cola's Eurasia/Africa revenues fell 15% annually and accounted for just 5% of its top line. Pretax earnings from the region, which accounted for 12% of its bottom line, also fell 22%. However, unit case volumes actually rose 11% in Central, East, and West Africa during the quarter.
Unfortunately, that robust growth was offset by volatile market conditions in the Middle East and "deteriorating conditions" in Russia. Therefore, bigger investments in top African economies like Nigeria could reduce the weight of the Middle East and Russian markets on the Eurasia/Africa unit.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends PepsiCo. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.