8-233-100

February 28, 2004

The Maharaja Dilemma:

Can Pepsi Thrive in Sri Lanka?
On January 1st, 1997, Mano Wikramanayake, Group Director of the Maharaja Corporation,
relaxed in his planters chair having finally arrived home in Colombo, Sri Lanka. His butler
brought him a tambali and handed him a fax on Donaldson Lufkin & Jenrette (DLJ) letterhead.
Mano asked is that all? His butler wiggled his head in affirmation, adjusted his sarong and
shuffled away to prepare supper. After his non-stop road show in New York City, Mano had
expected a pile of faxes from interested groups looking to enter as 3rd party investors to the
existing Ol joint venture between Maharaja and Pepsi. How could they be the only takers? he
thought to himself. The Sri Lankan economy was on the rise; Pepsis brand awareness was
growing; and the Maharaja Organization had a strong track record of marketing and distributing
a variety of products in the country.
With only one fax in hand, Mano wondered about the fate of the joint venture. He knew the joint
venture was highly undercapitalized and that Pepsi was not going to invest any more equity in
the project. Feeling the heavy burden of all the high-interest rate domestic loans that had helped
the Maharajas support operations for the last two years, Mano pondered his alternatives. After
large capital investments in bottling equipment, distribution trucks, and warehouses, did it make
sense for the Maharajas to abandon the joint venture? If not, could they turn things around
without the help of a third party investor? What if the DLJ offer is the best they can get given the
political instability in Sri Lanka? These questions began to overwhelm Mano, so he decided to
call his Finance and Marketing VPs to discuss the DLJ offer.

Joint Venture Inception: Pepsi & Ol Spring Bottlers

In 1985, PepsiCo International became interested in distributing their carbonated products in Sri
Lanka and entered into a franchise agreement with Ceylon Cold Stores (CCS). Despite the
successful launch, frustration quickly settled in as Pepsi saw itself white in the market1 for
three straight years. Further complications arose from a labor dispute in 1988 which ultimately
1. White in the Market refers to containers in the market with no product.

Sanjay Pamnani, Heidi Pellerano, Dhanusha Sivajee and Vidhi Tambiah, MBAs 2004, prepared this case for class discussion
rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright 2004 by Duke University, The Fuqua School of Business.

233-100

The Maharaja Dilemma

forced the government to take over the management of the company under emergency
regulations. In 1990, Pepsi terminated the franchise agreement. At this time, Les Ham, President
of PepsiCo Asia, realized he needed to find a new franchise partner, otherwise, he would be left
with no other option but to pull out of the Sri Lankan market completely.
Ham turned to The Maharaja Corporation. As Sri Lankas largest privately-held corporation,
Maharaja was looking to expand its portfolio of international brands. In 1991, after lengthy
negotiations, Pepsi awarded the franchise to the Maharaja Corporation. Under the agreement
(Exhibit 1), Maharaja would serve as the exclusive Pepsi franchisee in Sri Lanka and would
begin by bottling and marketing 300ml glass bottles of the Pepsi, Mirinda, and 7-Up brands
for a term of five years. The joint venture was named after Maharajas existing Ol Springs
manufacturing facility which in 1992 was retrofitted into a bottling plant. The plant was located
on a 19.5 acre property, in the Eastern outskirts of Colombo. Initially, the plant employed 265
employees and had a capacity level of 480 bottles per minute (bpm)
In 1992, Pepsi was officially re-launched in Sri Lanka under the wardship of a PepsiCo regional
office in Pakistan. The Pakistani office supported the launch with an ad campaign featuring
model Claudia Schiffer drinking out of a can of Pepsi (Exhibit 2). The launch date which is
usually a day of celebration quickly became a day of concern for the Maharaja Corporation.
They sat in their offices wondering why the advertisement provided by Pepsi featured a can
when only bottles were sold in Sri Lanka. Additionally, the entire Pakistani team did not turn up
for the launch on account of a religious festival. Could this be a sign of things to come?
Unfortunately, the answer was yes, as the Pakistani team continued to demonstrate little
commitment to the joint venture. As a result, the venture struggled during the first three years of
operation reporting loses of SL Rupees 4.9 million, 0.9 million and 78 million. The operation
was highly undercapitalized, but the Maharaja Corporation was not willing to invest further
unless Pepsi was willing to do the same.
In 1995, Roger Enrico took over the reigns of PepsiCo Inc. Mr. Enrico was a brilliant marketer
who understood the importance of building truly global brands. In May, he infused the project
with a $2 million equity investment and moved wardship to PepsiCo India (Exhibit 3). With
PepsiCos renewed commitment to the venture and positive outlooks for the Sri Lankan
economy, the Maharaja Corporation saw an opportunity to turn this venture around. However,
the capital infusions didnt prove to be sufficient. The Maharajas were saddled with highinterest debt and Pepsis market share had not grown as projected. Since Pepsi was not willing to
make any additional investments in the venture, it became clear that a third party investor was
the answer to their financial woes.
In December1996 as the Sri Lankan economy began to recover, Mano Wikramanayake, Group
Director of the Maharaja Corporation, flew to New York to pitch Ol to a group of potential
investors. He was looking to invoke interest in a private placement in Ol and received
favorable reviews from investors who were extremely bullish on Asian economies at that time.
Further he disclosed to investors, Ols plans to go public after two years first on the local stock
exchange and then in the US via an ADR offering which would allows investors an exit and an
opportunity to make an attractive return on their initial investment. After two weeks of meetings,

233-100

The Maharaja Dilemma

Mano returned to Sri Lanka hopeful that Ol was going to receive the necessary capital to
restructure operations and begin to rival Pure Beverages and CCS for market share.
To Manos dismay, only one investor, Donaldson Lufkin & Jenrette (DLJ), a publicly held U.S.based investment bank and financial services provider, submitted a proposal. Highlights of
DLJs offer are shown in Exhibit 4. It was obvious from the offer that DLJ was concerned about
the various risks that could plague a project in an emerging market like Sri Lanka and wanted
substantial downside protection for its investment. However, were they asking for too much?
Where there other ways for the Maharajas to mitigate DLJs concerns?

Sri Lanka
Sri Lanka, (Exhibit 5), is an island off the southeast coast of India. It is approximately the size of
Ireland but with a population the size of Australia (19m). There are two main ethnic groups, the
Singhalese (Buddhist majority) and Tamils (Hindu minority). There are a number of other
important minorities such as Muslims, Chettiahs, Sindhis and Eurasian Burghers. Sri Lanka is
rich in natural resources. Its main industries include agriculture, mining and tourism.
Unfortunately, the island has never been able to fully exploit its resources because of the
devastating ethnic conflict that has raged since 1983. (Exhibit 6)
Ethnic Conflict
Sri Lanka was colonized in turn by the Portuguese, Dutch and the British. The British employed
their divide and conquer approach to administering the island. They found a minority of
Tamils and Singhalese open to Christian conversion. They gave the top administrative posts to
this Christian elite who enjoyed power and privilege over the Buddhist majority. After
independence in 1948, a Singhalese Christian government came to power and upheld rights for
all minorities. However, on the wave of a Buddhist backlash, a leading Christian Singhalese,
S.W.R.D Bandaranaike, converted to Buddhism and came to power promising to end nonBuddhist policies. A Buddhist monk later assassinated him because he was yielding too much to
his erstwhile Christian colleagues. Thus, consequent governments introduced even more policies
favoring the Buddhist majority at the expense of other minorities.
The Tamils started a peaceful struggle for their rights which lasted from the early 50s to late
70s. A new pro-Buddhist government in 1978 sidelined Tamil and other minority rights further
and introduced a new executive presidency that had the rights to dissolve parliament and effect
military control without recourse to the parliament. This government instigated yet more
policies to favour the majority. The Tamils reacted violently in the North of the country, killing
policemen and military personnel. Ethnic tensions rose to a peak in 1983 when an alleged
government-led riot was directed towards Tamils in Colombo and several other towns. Tamil
businesses and homes were razed. Tamils who could afford to flee the country sought refuge in
the UK, US, Canada and Australia. Others risked life and limb crammed on boats headed
towards India. Those Tamils left behind waged a guerilla style war led by Vellupillai Prabakaran
- the Fox. The Tamil Tigers as they became known soon became a highly disciplined and
effective guerilla group. Their suicide bombings quickly became a trademark. Assassinations

233-100

The Maharaja Dilemma

attributed to them include Rajiv Gandhi (former Indian Prime Minister for his decision to send
in the Indian Peacekeeping Force) and Ranasinghe Premadasa (President of Sri Lanka). The
government responded by incurring curfews and a high military presence in Colombo.
Exchange Rate and GDP
The Sri Lankan Rupee (SLR) is allowed to float against a basket of currencies with the US$ as
the intervention currency. The Central Bank maintains a 2% margin between daily buying and
selling rates, to guide commercial banks in quoting their rates. The value of the Rupee has
fluctuated since 1978, but the overall trend has been downwards, (Exhibit 7), reflecting the
persistent current-account deficit and relatively high inflation rates. (Exhibit 8)
In 1989, a rigorous liberalization program was introduced by Mr. Premadasas UNP government.
The economic reform programme was supported by an IMF Enhanced Structural Adjustment
Facility (ESAF). Stabilization measures included a devaluation of the Rupee and the abolition of
major subsidies. These were complemented by an ambitious privatization drive. Tax, tariff and
trade reforms were also instituted and the current account was freed of exchange controls. GDP
growth rose from 2.3% in 1989 to 6.9% in 1993. The Peoples Alliance (PA) government
pledged itself to continue with the economic reform programme.
Since 1991, the share of industry (manufacturing, construction and utilities) has increased from
25.7% to 28.8% of real GDP. (Exhibit 9) In particular, manufacturing has emerged as the lead
sector underpinning economic growth. Progressive privatization of state enterprises has enabled
the private sector to dominate manufacturing. Small and medium enterprises account for nearly
90% of private industrial units. The services sector accounted for 48.7% of GDP in 1995 and is
principally composed of wholesale and retail trade, financial services, transport and
communications, public administration and defense and tourism. (Exhibit 10)
Monetary Policy
In recent years, monetary policy has focused principally on the control of inflation with the
Central Bank relying on indirect policy instruments including open market operations in
Treasury bills and Central Bank securities to influence the growth of monetary aggregates. In
1992-93 monetary growth was fuelled to a great extent by a large increase in foreign capital
inflows and an expansion in private-sector credit which necessitated the operation of a tight
monetary policy. (Exhibit 11) In 1993-95, an even stronger emphasis on controlling inflation led
to a tightening of monetary policy to compensate for high defense spending and a widening
fiscal deficit.
High inflation has been a persistent problem in Sri Lanka over the past decade. (Exhibit 8) Costpush factors such as wage adjustments, increases in indirect taxes, high interest rates and
exchange rate depreciation have contributed to increases in the price level. (Exhibit 12) Seasonal
scarcities of agricultural commodities and inefficient agricultural production have also been
responsible. In recent years, the principal causes of demand-induced inflationary pressures have
been the high level of government spending and the rapid rate of monetary expansion. In 1988-

233-100

The Maharaja Dilemma

93 annual average inflation was 13.6%. It was suppressed artificially to 8.4% in 1993 and to
7.7% in 1994 by a combination of subsidies and reductions in key administered prices.
Persistently high inflation has prevented any real increase in incomes since wage increases have
generally not kept pace with the rise in prices. There are no reliable statistics for income
distribution, but anecdotal evidence suggests a marked deterioration in income disparities. Thus,
many industries have been adversely affected by strikes initiated by labor/trade union forces
seeking to remedy this malady. (Exhibit 13) Rising food prices have also prevented any
significant rise in discretionary spending with more than 85% of incomes being spent on basic
necessities.
Since the average rate of inflation in Sri Lanka has tended to be higher than those of its
competitors, the countrys export price competitiveness has suffered. This problem has been
exacerbated by high interest rates and the lack of sources of concessionary financing to the
export sector. Since exchange rate depreciation also fuels inflation, the government has been
reluctant to devalue the currency to the extent exporters are demanding.

Maharaja Corporation
The Maharaja Group is Sri Lankas largest conglomerate in terms of sales with an annual
turnover of US $ 175 million for the year ended March 31, 1996. The two founding members
Mr. S Mahadevan and Mr. S Rajandram had worked for an American firm called Dodge &
Seymore Ltd which held agencies in Sri Lanka for prominent companies such as Union Carbide
Limited, Colgate Palmolive Limited, Yale & Towne Limited, Champion Spark Plugs Limited,
Parker Pen Limited and Cheeseborough-Ponds Inc. At the time of World War II, Dodge &
Seymore closed their office in Sri Lanka (then known as Ceylon) and handed over the agencies
to Messrs S Mahadevan and S Rajandram.
At the inception, the agencies were serviced on an indirect basis however gradually through time
the distribution reach extended beyond the capital city of Colombo to other parts of the country.
This effectively laid the foundations for a formidable sales network that was leveraged in later
years to introduce products from other agencies and joint ventures.
The Maharaja Organization was incorporated in 1967 though a merger between the various
subsidiaries Rajadrams Limited, Maharaja Distributors Limited and A.F. Jones & Co. Limited.
Since 1967 the Maharaja Group has been run by Messrs R Maharaja and R Rajamahendran
jointly as Managing Directors
In 1997, the Groups operations remained highly diversified with interests in imports, local
manufacturing, distribution and marketing, export commodity trading, tourism, clearing and
forwarding, project development, computer services, soft drink bottling, television and radio
broadcasting, satellite communications, beauty care, a flying school and a domestic air service.
One of the Groups most successful joint ventures was with the New Zealand Dairy Board that
manufactures and markets milk and milk products in Sri Lanka under the Anchor Brand name.
The Maharaja Groups excellent distribution network has made it a household name in a

233-100

The Maharaja Dilemma

predominantly rural country and its marketing track record made the company the top choice of
partners in joint ventures in the Sri Lankan market. Furthermore, the Group was also able to
utilize its ownership and presence in media operations to promote its joint venture and marketing
operations.

PepsiCo International (Exhibit 14)

The carbonated soft drink market had, in recent years become increasingly competitive as
Western markets matured and multinational firms began increasing global operations as a means
of continued growth. Historically, the early mover into a white market (an area with no
previous distribution of Coke or Pepsi) continued to hold the majority market share as the market
matured. Thus, it was seen as critical to enter new markets as soon as they became politically and
economically accessible.
Instead of going head-to-head with Coke in almost every market in the world, Pepsi had focused
its efforts on high-potential emerging markets such as China, India, Russia and Vietnam. These
countries had high populations and low soft drink consumption rates, which translated into
tremendous growth prospects. (Exhibit 15) Pepsis strategy was to capitalize on this growth by
leveraging its already strong market position (at least 20% market share) in these markets.
(Exhibit 16)
By 1997, PepsiCo was selling about three billion 8-oz cases of soft drinks outside North America
under a different set of brands that included Seven-Up, Mirinda (orange soda) and Pepsi Max (no
calorie cola). About 60% of Pepsis international volume was sold by independent bottlers,
while the remaining 40% was handled by bottlers in which PepsiCo either controlled or had
some equity stake.
In evaluating the merits of entering a new market or making a major investment in reviving an
old one, PepsiCo looked for a 14% internal rate of return, after adjusting for expected inflation
and country risk, over a 12-year horizon. PepsiCo also measured the success of an investment
against a 7% corporate ROA target. These criteria where then supplemented with a fivefold
characterization of investment opportunities:
Big developed soft drink markets;
Smaller or riskier markets;
Opportunities to invest in jump-starting channels or segments within the first two
categories;
21st century markets; and
Turnaround opportunities as the bottler of last resort.
PepsiCo had categorized Sri Lanka in the second of these five categories. It looked at Sri Lanka
as a natural extension of its investment in India, which it categorized as a twenty-first century
market. However, they could not ignore the inherent limits on size of population and growth
plus the risks that Sri Lanka bore as a country engaged in civil war. From Pepsis perspective, it
was critically important for Ol to capture market share. Revenue from the sale of bottles was a

233-100

The Maharaja Dilemma

secondary concern for Pepsi, especially as its returns would be largely generated by the sales of
concentrate to Ol.

The Soft Drink Industry

The soft drink industry is composed of four key players: franchise companies, bottlers, retailers
and consumers. Franchise companies are the owners of the brands. They manufacture the soft
drink concentrate and market the brands. The franchisers business enjoys high gross margins of
close to 80%. Their biggest expenses come from marketing, advertising, promotion, market
research and managing their network of bottlers. The bottlers purchase the concentrate, mix it
with sweeteners, and carbonated water, package and distribute the finished product and promote
the products locally. (Exhibit 17) The bottlers business is very capital intensive needing
specialized-high speed equipment, distribution trucks, warehouses and info management
systems. The bottlers gross margins are much lower, typically in the 15-45% range. Bottlers
ultimately have the choice on how the product is presented to the market. In emerging markets
like Sri Lanka, bottlers prefer to package their products in glass bottles because with the lower
price points, the reusable package format is more affordable as opposed to the disposable
aluminum cans.

The Sri Lankan Soft Drink Market

Although accurate information about the Sri Lankan carbonated soft drink market is difficult to
obtain due to the absence of a tracking agency, total consumption is estimated to be at around
16.5 million cases per year and projected to grow to approximately 20 million cases per year by
2004. Sri Lankas per capita soft drink consumption is one of the highest in the region (22
servings) beating out India (5) and Pakistan (13). However, soft drink consumption is only onethird of the beverage market as non-carbonated drinks like lemon/lime and orange continue to be
the big sellers. The market is highly seasonal with a 30%-40% drop in sales during winter and
summer monsoon months and highly dependent on tourism. Industry experts project that the
carbonated soft drink market will grow at 7% annually in the foreseeable future.
The carbonated soft drinks market is dominated by three major players the local Elephant
House brand owned by John Keells and managed by Ceylon Cold Stores, Coke distributed and
marketed by Pure Beverages, and Pepsi distributed and marketed by the Maharaja Group. The
Elephant House brand leads with a market share estimated to be 45% followed by Coke and
Pepsi with 42% and 15% share respectively. (Exhibit 18)
In the early 1980s, the Sri Lanka soft drink market was controlled by the government under a
competent authority arrangement. However, despite the lack of competition and a captive
market, the business was poorly run. In 1982, the government-run agency was restructured and
renamed Ceylon Cold Stores (CCS). CCS was later purchased by the John Keells Holdings
(JKH) Group in 1991. CCS number one asset is - the Elephant House Brand of soft drinks
which has been around since the 19th century. CCS has predominantly focused on product

233-100

The Maharaja Dilemma

segments where its competitors are relatively weak or do not have a comparable drink like fruit
flavored soft drinks sold under the Elephant House Brand. Currently, there are five different fruit
flavors, which account for 65% of revenues. Its plum flavored soft drink Necto enjoys strong
consumer preference - especially since there is no comparable product in the market. CCS has
traditionally placed greater emphasis on pricing and offers the CCS 400ml bottle for the same
price as 300ml bottles of Pepsi and Coke. This large size allows the drink to be shared by two
consumers effectively halving the price per consumer in a highly price conscious market. The
Elephant House brand has great recall, the Singhalese words Aliya Beanna (meaning Elephant
Brand) are the colloquial term for a soft drink. Furthermore, the brand commands a high
premium among distributors and retailers who willingly pay in cash for all purchases. Thus,
John Keells has had zero defaults while its competitors have suffered from substantial bad debt
problems.
Coke entered Sri Lanka in the early 1960s by granting a bottling franchise to the Pure Beverage
Company, a local Sri Lankan bottler. Pure Beverage was authorized to distribute and market
Coca Cola, Sprite and Fanta. Coke could not make much headway in the market until the late
1970s. At that time, the Elephant House was having severe management problems and the
economy had begun to open up. With the introduction of television, Coke was able to capture
the imagination of the Sri Lankan consumers through attractive advertising campaigns. Behind a
strong advertising push, Coke was able to overtake Elephant House in the early 80s. By 1991,
prior to John Keells taking over CCS, Coke had captured nearly 70% of the market. In response
to Cokes advertising, CCS moved into more aggressive advertising aimed at specific market
niches which placed more emphasis on the taste preferences of consumers. In December 1996,
Pure Beverages Kaduwela plant was shut down for almost four months due to labor problems.
This resulted in severe supply problems leading to an 8% fall in Cokes market share to 42%.
CCS capitalized on Cokes problems and increased its market share by 6% to 46%. Although it
has been present in the market for more than three decades, Coke has never been able to sustain a
sizable market share like it has in other international markets. The main reason for this disparity
was the step-motherly treatment towards the Sri Lankan market from Cokes South Asian
headquarters which oversaw operations in Sri Lanka.

Ol Performance
Ol had shown poor results from its inception and was yet to make a profit. Exhibit 19 shows the
capital infusion schedule which was required to keep the business reasonably capitalized. A lot
of the initial demands arose from the need to put an effective distribution system in place that
could not only distribute the product but also collect the empty glass bottles for re-use.
Additionally the initial production of glass bottles, purchase of distribution equipment and
acquisition of coolers (given free of charge to retailers) necessitated heavy capital expenditure.
However the main contributor to the negative bottom line was the high operating cost which was
being gradually reeled in. After the initial years where the Maharajas had learnt the ins and outs
of the soft drinks business, the manufacturing and distribution operations had started to run more
efficiently. Just then that a series of militant attacks bought a crisis in Sri Lanka resulting in

233-100

The Maharaja Dilemma

tourists, substantial consumers of cold drinks in Sri Lanka, stayed away from the country. This
largely contributed to another loss making year, the fourth in a row, at Ol.
The next year a peace was restored and Ols prospects once again looked bright. The Sri Lanka
economy was once on the upswing and the Maharajas got ready for a massive campaign to win
market share from their competitors. They realized this would require a fresh dose of capital
injection into the venture. Already saddled with a heavy and expensive debt load, the only viable
alternative was equity infusion. Although the firms projections looked very attractive (Exhibit
20 & 21), both the Maharajas and Pepsi were hesitant to add to their sizeable equity stake. Both
sides however felt that given the buoyant market conditions, there would be plenty of thirsty
investors who would be willing to guzzle down the risk.

Maharaja Dilemma
Given the competitive landscape and the current political and economic environment in Sri
Lanka, it was evident that Mano was facing a tough decision in terms of securing an outside
investor in the Ol joint venture. He was fast running out of time and capital but remained
unclear as to the attractiveness and feasibility of the DLJ proposal. Could he negotiate a better
deal or was he at the mercy of DLJ offer and the ambigious put option clause?
As Mano finished up his tambali, he pondered the best approach to resolving Maharajas
dilemma. An NPV valuation from the perspective of a third-party investor seemed liked an
interesting analysis but how would he estimate cash flows and the all important discount rate?
Mano put down his glass and started to call his trusted Marketing and Finance VPs.

233-100

The Maharaja Dilemma

Exhibit 1: Summary of Agreement between PepsiCo International and The Maharaja Corporation
PepsiCo, Inc. entered into three agreements with the Company (Ol) in 1992 allowing to exclusively
market Pepsi, Mirinda and 7-Up soft drinks. These agreements are valid for a term of five years
(1997) and can be automatically extended for one additional period of five years (2002) so long as the
Company is not in default of any of its obligations.
These agreements also provide for: (i) the allocation of advertising expenses and (ii) the cost of the
concentrate that the Company purchases from PepsiCo, Inc.
As part of the exclusive bottling agreements between the Company and PepsiCo, Inc. in respect of
Pepsi, Mirinda, and 7-Up brands, PepsiCo, Inc. has agreed, subject to the terms and conditions
contained therein, to pay 100% of the marketing costs in 1993, 80% in 1994, 60% in 1995, 45% in 1996
and 30% in 1997 with the balance paid by the Company. Thereafter, the 30% continues to be paid by
PepsiCo.
In line with policy, PepsiCo, Inc appoints a Country Manager in Sri Lanka who is responsible for the
marketing of the PepsiCo, Inc. brands. Additionally, he is in charge of developing and maintaining all
operating procedures to ensure that the Company meets PepsiCo, Inc.s standards

Exhibit 2: Pepsi Re-Launch Supporting Advertising

10

233-100

The Maharaja Dilemma

Exhibit 3: Ol Capital Structure

1992

20%
80%

1996

65%

35%

11

233-100

The Maharaja Dilemma

Exhibit 4: DLJs Proposal

DLJs proposal was to invest US $3 million in exchange for 17,460,000 convertible preference
shares of Ole Spring Bottlers at par value of SL Rupees 10 each. In addition to the shares, DLJ
would also receive a Put Option that was guaranteed for execution by both the Maharaja Group
and Pepsi. The Put Option when exercised allowed for a 10% annually compounded US Dollar
return on DLJs initial investment and had two exercise periods the first at the end of three
years and second at the end of four years from the share purchase agreement. DLJ purpose of
investing in Ole was to finance it intermittently before its stake could be liquidated either
through another private placement or sale after an IPO. As an investment bank DLJ was well
connected to offer its stake to other investors in a private placement sale or help take the Ole
public if market conditions were suitable. However in case Oles performance was below
expectations due to any reason, DLJ had put into place a safety net for itself in the form of the
put option agreement.

Exhibit 5: Sri Lanka

12

233-100

The Maharaja Dilemma

Exhibit 6: Impact of Ethnic Conflict in Market Performance

Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997

Exhibit 7: Rupee Exchange Rate

Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997

13

233-100

The Maharaja Dilemma

Exhibit 8: Sri Lankas Inflation Rate

Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997

14

233-100

The Maharaja Dilemma

Exhibit 9: Sri Lankas Economic Indicators

Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997

15

233-100

The Maharaja Dilemma

Exhibit 10: Tourism

Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997

Exhibit 11: Foreign Investment

Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997

16

233-100

The Maharaja Dilemma

Exhibit 12: Interest Rates

Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997

Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997

17

233-100

The Maharaja Dilemma

Exhibit 13: Impact of Strikes on Productivity

Source: Sri Lanka Strategy: Bargain Buy, Sri Lanka Research December 1997

Exhibit 14: PepsiCo International

MORGAN STANLEY DEAN WITTER, August 4, 1997, PepsiCo (PEP):The Face of PepsiCo Is Changing

18

233-100

The Maharaja Dilemma

Exhibit 15: Per-Capita Soft Drink Consumption

MORGAN STANLEY DEAN WITTER, August 4, 1997, Global Soft Drink Bottling Review and Outlook:
Consolidating the Way to a Stronger Bottling Network

19

233-100

The Maharaja Dilemma

Exhibit 16: PepsiCo Market Share Advantage

MORGAN STANLEY DEAN WITTER, August 4, 1997, Global Soft Drink Bottling Review and Outlook:
Consolidating the Way to a Stronger Bottling Network

Exhibit 17: Ols Cost Breakdown

The major ingredients used in the production of the Companys (Ol) soft drink products include
water which comes from the plants own wells; sugar which is supplied from several suppliers in
Sri Lanka; concentrates which are supplied by PepsiCo, Inc. under license and Bush, Boake
Allen; carbon dioxide which is supplied from Ceylon Oxygen under contract in Sri Lanka; bottle
washing and water treatment chemicals such as caustic soda, the majority of which are sourced
within Sri Lanka from several suppliers; crowns which are supplied from two suppliers in Sri
Lanka; glass bottles which are currently sourced from three suppliers in India.
Cost breakdown per unit of soft drinks is as follows:
Direct Cost
49.9%
Manufacturing Cost
2.9%
Excise Duty
4.3%
Sales & Distribution
20.0%
General & Administration
2.5%
Administration & Marketing
5.9%
Operating Margin
15.4%

20

233-100

The Maharaja Dilemma

Exhibit 18: Market Shares by Competitor

21

233-100

The Maharaja Dilemma

Exhibit 19: Share Capital Schedule

22

233-100

The Maharaja Dilemma

Exhibit 19: Ole Pro forma Income Statement

23

233-100

The Maharaja Dilemma

Exhibit 20 contd: Ole Pro forma Income Statement

24

233-100

The Maharaja Dilemma

Exhibit 21: Ole Pro forma Free Cash Flow Projections

25

233-100

The Maharaja Dilemma

References
Conway, Andrew J., Massot, Sylvain, Serra, Lore, Dormer Jim, and Mayo, Scott, Global Soft Drink
Bottling Review and Outlook: Consolidating the Way to a stronger Bottling Network, Morgan
Stanley Dean Witter, August 4, 1998.
Conway, Andrew J., PepsiCo: The Face of PepsiCo is Changing, Morgan Stanley Dean Witter, August
7, 1997.
Ghemawat, Pankaj Pepsi: The Indian Challenge, Harvard Business School, Case # 9-793-060, March
28, 1995.
PepsiCo, Brown Brothers Harriman & Co., May 22, 1997.
Private Invitation to Subscribe for 40,000,000 Ordinary A Shares of Rs. 10.00 each at a price of Rs.
10.00 per share, Ol Springs Bottlers Limited Private Placement.
Put Option Agreement, July 30, 1997.
Share Holders Agreement, July 30, 1997.
Share Purchase Agreement, July 30, 1997.
Solomon, Jennifer F., PepsiCo Preparing to Visit Rogers Neighborhood, Salomon Brothers, May
29, 1997.
Sri Lanka Country Report, Economic Intelligence Unit, May 1996
Sri Lanka Country Report, Economic Intelligence Unit, October 1996
Sri Lanka Food & Beverage Sector: Ceylon Cold Stores, Indosuez W.I. Carr Securities, February 11,
1998.
Sri Lanka Strategy Bargain Buy, Indosuez W.I. Carr Securities, December 1997.
Sri Lanka Weekly No. 21, Indosuez W.I. Carr Securities, May 1997.
Subsidiary Guaranty, July 30, 1997.
Yuan, Peter and Crum, Geoff PepsiCo Changchun Joint Venture: Capital Expenditure Analysis, Richard
Ivey School of Business, Case# 900N16, January 19, 2001.

26

233-100

The Maharaja Dilemma

Interviews:

1. Srilal Ahangama, Finance Director, The Maharaja Company

2. Mano Wikramanayake, Group Director, The Maharaja Corporation
3. Nadija Tambiah, John Keells Holdings Group
4. Laksiri Wickramage, John Keells Holdings Group

27