Fitch: Arca Continental's Agreement with KO to Have No Immediate Ratings Impact

According to Fitch Ratings, Arca Continental, S.A.B. de C.V.'s (Arca Continental) announcement that it has signed letters of intent with The Coca-Cola Company (KO) and Coca-Cola Bottling Company UNITED to refranchise bottling operations in some territories of the U.S. will have no immediate effect on its rating. In Fitch's view this transaction should not have a material effect on Arca Continental's financial profile, as it is expected to be executed through equity exchange. A significant variation from our expectation could pressure the ratings.

In terms of operations, Fitch believes the agreement should strengthen Arca Continental business position by expanding its geographic footprint to contiguous territories, helping it access hard currency revenue, positioning it as a relevant bottler in terms of scale in the U.S., and reinforce its strategic importance as a partner of KO. However, we are cautious about the operating and market conditions in these territories as consumers' preferences become more health conscious in relation to beverages and the possibility of a structural debt subordination at the ultimate holding company, Arca Continental. Financial and volume information of the territories in the U.S. was not disclosed by the company. The transaction is expected to be completed in the first half of 2017.

The announced agreement stipulates that KO will contribute the operating territories of Texas and parts of Oklahoma, New Mexico and Arkansas, including distribution and production operations, in exchange for a 20% equity stake in a new, privately held entity. This entity, AC Beverages, will be a subsidiary of Arca Continental and will also include all of its existing beverage businesses in Latin America. The agreement includes 11 cold-fill production facilities located in El Paso, Dallas, Fort Worth, San Antonio, McAllen, Abilene and Nacogdoches, plus two in Houston, TX and two in Oklahoma.

In addition, Coca-Cola Bottling Company UNITED will become a minority joint-venture partner in a subsidiary of AC Beverages that will control the U.S.'s operations by contributing its Oklahoma territory.

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