Delta case

Topics: Leverage, Leveraged buyout, Debt Pages: 3 (1644 words) Published: October 29, 2014
Delta Beverage Group, Inc. is an independent bottler of Pepsi products in the United States. These products include franchised brands like Pepsi, Mountain Dew, Dr. Pepper, 7-up and more. These drinks are sold in a variety of containers but PET bottles and aluminum cans are used the most. Delta has concentrated most of its business in the South Central United States, which includes parts of Tennessee, Arkansas, Louisiana, and Mississippi. In 1993, Delta reached an agreement with its senior debt holders to avert defaulting on its debt. As a result, total debt decreased from 193 million to 140 million and the average maturity of the debt from 5.0 to 6.8 years. However, the sinking fund provision for this new debt meant that the debt repayment schedule started almost immediately. In the first half of 1994, aluminum cash prices on the London Metal Exchange (LME) had risen by 30. Because of this, John Bierbaum, CFO of Delta Beverage Group, Inc., wondered whether this increase in aluminum prices would affect the prices of the aluminum cans bought by Delta and therefore her profit margin. Bierbaum has to consider the financial implications this has regarding the company. Because of these, Delta needs to consider about having a new plan in order to deal with this challenge, one that includes new prices, new costs and maybe also further negotiations with the suppliers of the company. Bierbaum has considered two options. The first one is an operational hedge. Under this option, Delta would try to alter its product mix, which is dominated by cans, to sell more drinks in PET bottles. Hereby, exposure to aluminum prices would be reduced. On top of that, PET bottles carried a higher profit margin compared to cans. However, Bierbaum concluded that this was no feasible option. The second option is a financial hedge on aluminum. Under this option, Delta would purchase futures contracts to try to fix the higher costs in advance. The question concerning this case is whether hedging...
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