Delta Beverage Group, Inc

21 Pages Posted: 21 Oct 2008

See all articles by Kenneth M. Eades

Kenneth M. Eades

University of Virginia - Darden School of Business

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Abstract

Delta Beverage is facing severe cost control problems. In addition to the high interest expense, the cost of aluminum cans and PET containers have risen substantially during the past year. The student must decide whether the CFO should hedge aluminum to avoid the risk of violating a loan covenant. The case works well as an introduction to risk management.

Excerpt

UVA-F-1188

DELTA BEVERAGE GROUP, INC.

It was July 1994, and John Bierbaum, chief financial officer (CFO) of Delta Beverage Group, Inc., sat at his desk at the company's headquarters in Memphis, Tennessee. As he considered the company's promising future, he reflected on how close Delta had come to bankruptcy a couple of years earlier. In the last six years, the group had managed to turn around operations, and recently it had been on a buying spree and had acquired significant new franchises in its area of concentration, the South Central United States. The recently completed recapitalization plan had helped put the company back on solid financial footing, and Delta seemed to be poised for some real success.

During the first half of 1994, however, the price of a core raw material, aluminum, had risen 30% on the London Metal Exchange. Because aluminum cans were a key cost component for Delta, Bierbaum expected that the price Delta paid for its cans would be raised when negotiations with suppliers came up for renewal in a few months. Fueled in part by their quest for volume, the price charged by the can producers had been trending downward during the past few years. Although the past changes in can prices had been independent of how the price of aluminum had changed, Bierbaum wondered if this recent increase in aluminum cost for the can smelters, sheet makers, and can producers would flow through to the price Delta paid for aluminum cans. Perhaps now was the time for Bierbaum to consider a hedging program using aluminum futures contracts to offset the potential price increase and to help the company to maintain its financial footing.

History of Delta Beverage Group, Inc.

As one of the top five independent bottlers of Pepsi products in the United States, Delta Beverage Group had become an important part of the franchise system of PepsiCo, Inc., in 1994. Delta's franchise areas included parts of Tennessee, Arkansas, Louisiana, and Mississippi. The company was originally the Mid-South Bottling Co. until March 1988, when it was purchased in a leveraged buyout (LBO) led by the Pohlad family, who themselves had over 30 years of bottling experience, including running the third-largest Pepsi bottler in the United States. At the time of the buyout, PepsiCo, Inc., (through a subsidiary) took a 16% equity stake in the company as well as a portion of preferred stock. It was then that Mid-South was renamed Delta Beverage Group, Inc.

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Keywords: hedging, risk analysis, risk management

Suggested Citation

Eades, Kenneth M., Delta Beverage Group, Inc. Darden Case No. UVA-F-1188, Available at SSRN: https://ssrn.com/abstract=909403 or http://dx.doi.org/10.2139/ssrn.909403

Kenneth M. Eades (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4825 (Phone)
434-924-0714 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/eades.htm

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