Citibank Vs. Pepsi: A Mexican Standoff

Citi and Pepsi squabble over a loan gone south of the border

Welcome to the Latin American debt crisis redux--or at least a nasty little aftereffect of it.

With the 1980s and mid-1990s crises still being felt, Citicorp, which led the world's banking community into Third World lending in the mid-1970s, is fighting to recover a bum $20 million loan to a Mexican soft-drink bottler. Normally, such a loan by the nation's second-largest bank wouldn't make much of a ripple inside or outside Citibank.

This was no ordinary bottler, however. It is a joint venture partly owned by PepsiCo Inc., which is trying to make a big push into emerging markets, especially Latin America. PepsiCo is a long-standing Citicorp client whose chairman and former CEO, Wayne Calloway, still sits on the Citi board of directors. Calloway could not be reached for comment. Pepsi is refusing to cover not only the $20 million Citi loan, which was made for bottle purchases, but another $50 million in credits and leasing agreements extended by other banks and suppliers.

COLA WARRIORS. Citi, sources say, is furious at Pepsi. The bank apparently believed that it had a gentlemen's agreement calling for Pepsi to stand behind the loan, which was made to Embotelladora Agral Regiomontana, a Monterrey bottling concern in which Pepsi holds a 49% stake. That's not the way Manuel Rubiralta, president of PepsiCo de Mexico, sees it. "There was no gentlemen's agreement," he says. A spokesperson for Citibank in New York says, "Our relationship with Pepsi is strong and we expect it to continue as such." Neither party in this rare head-to-head confrontation between two of the most aggressive multinationals seems ready to back down.

Agral, which defaulted in July, is the latest in a series of Latin Pepsi bottlers to succumb in the high-stakes cola wars now being fought between Coca-Cola Co. and Pepsi in fast-growing emerging markets, notably Latin America, India, China, and Southeast Asia. Coke is winning, outselling Pepsi 3 to 1 outside the U.S.

Sources say Citibank is now threatening to suspend financing for bottle inventories at three other Mexican bottlers if they don't reach an agreement over the Agral debt, a development that would further undermine Pepsi's marketing efforts, which are already floundering from Patagonia to the Rio Grande. In May, Pepsi took over Buenos Aires Embotelladora, Pepsi's main South American bottler, which defaulted on $75 million in loans from Citibank. Pepsi is now negotiating with creditors to restructure the company. And last month, Pepsi's anchor bottler in Venezuela defected to Coke.

Craig E. Weatherup, CEO of Pepsi-Cola Co., acknowledged in a Sept. 9 letter to bottlers that Pepsi has suffered operating setbacks in a number of markets, especially Latin ones. The letter sought to reassure bottlers, but did not get into the issue of bank loans to creditors. "I think there was a general understanding that Pepsi was behind Agral," says one creditor close to the situation. "Sometimes somebody's word is as good as something in writing."

While there is no indication that Citi and Pepsi are about to part company over the incident, the matter is being thrashed out at the highest levels of both companies. If in fact there was an unwritten assurance or gentlemen's agreement, this incident surely illustrates the hazards of relying on them, even when they are made by a bank's largest and most creditworthy customers.

DESERT STORM. Pepsi's--and Citi's--troubles in Monterrey date back to 1993, when Pepsi, as part of a $750 million drive to boost its Mexican market share to 40% from 25%, launched a $60 million marketing blitz it brashly dubbed "Desert Storm." Mexico is the world's second-largest cola market, after the U.S., and Monterrey is surely one of the world's prizes in the global cola wars. Residents of Mexico's arid industrial capital consume more cola per person than any other place in the world. But for decades, cola meant Coca-Cola in Monterrey, and Pepsi was virtually invisible.

Pepsi had entered the Monterrey market in earnest in late 1992 when it bought a stake in its local bottler to form Agral, which holds the franchise for a chunk of Northern Mexico. Although Pepsi's partner, Monterrey construction and food conglomerate Grupo Protexa, is the majority owner, Pepsi took over management of the bottler. Two local banks, Inverlat and Banca Serfin, agreed to finance a new plant, equipment, and trucks. American Refrigeration Products advanced $10 million to finance coolers. Confident that Agral was fully backed by Pepsi, Citibank stepped in with $20 million to finance bottle purchases. Until 1994, that deal was backed with a written guarantee from Pepsi. After the written guarantee was removed, Citibank raised the rate on the loan, although the rate was still lower than it would have been if Protexa was the sole owner. If Citibank really believed there was a gentlemen's agreement, then why, asks PepsiCo's Rubiralta, did Citibank raise the rate on the loan after the written guarantee was removed?

The blitz initially looked like a success. Pepsi's local market share in colas rose to about 20%, from a paltry 8%. But Coke hit back with a price war that choked Pepsi's margins. The campaign quickly faltered. Then came the December, 1994 peso devaluation. Saddled with more costly dollar-denominated debt, Agral began missing payments. "We weren't prepared to grow so fast," admits Rubiralta.

For the moment, at least, creditors are insisting that they be reimbursed in full. "Any settlement will require capitalization from the partners," says PepsiCo's Rubiralta. "That could mean the creditors take a haircut, it could mean they renegotiate longer maturities, it could mean a lot of things." The ideal settlement will probably involve a combination of options, he says. "I want to avoid this becoming a black mark."

But that may be difficult for both of these quarreling multinationals.

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