By Steven Skomra, Dylan Barnacle, Zach Trotzky (Georgetown University), Christopher Gvenetadze, and Alessandro Carleo (Bocconi University) | 22/03/2020
Overview of the deal
PepsiCo is set to acquire Rockstar Energy in attempts to increase their presence in the energy drink market. According to the terms of the agreement, PepsiCo will provide $0.7 bn of payments related to future tax benefits associated with the transaction, payable over up to 15 years. The company does not expect the transaction to be material to its revenue or earnings per share in 2020. The transaction is subject to typical closing condition and regulatory approval, and is expected to close in the first half of 2020. Pepsi and Rockstar have previously had a distribution agreement in North America since 2009, however, this strategic acquisition by PepsiCo will help expand their energy portfolio which already includes Mountain Dew’s Kickstart, GameFuel and AMP. The decline in demand for sugary sodas has urged companies such as PesiCo and Coca-Cola to broaden their developments in this in categories such as functional beverages and energy drinks, categories which have been dominated by companies such as Red Bull and Monster Beverage. PepsiCo’s extensive distribution should lead to positive effects on Rockstar’s reach, and the diversity provided by Rockstar products should help PepsiCo remain competitive in the energy drink market with the likes of Coca-Cola who recently launched the Coca-Cola Energy line.
Acquirer: PepsiCo, Inc.
Target: Rockstar, Inc.
Estimated value: $3.85 bn
Announcement date: 03/11/2020
Acquirer Advisors: Centerview Partners LLC
Target Advisors: Goldman Sachs & Co. LLC
Company Details (Acquirer - PepsiCo)
PepsiCo is an American food, snack, and beverage company which manufactures and distributes its products in more than 200 countries. With a complementary portfolio of brands including Frito-Lay, Gatorade, Pepsi-Cola, Quaker, and Tropicana, PepsiCo generates retail sales of over $1 bn. It operates through the following business segments: Frito-Lay North America; Quaker Foods North America; North America Beverages; Latin America; Europe Sub-Saharan Africa; and Asia, Middle East, and North Africa. Within these segments include products such as chips, flavored snacks, cereals, rice, pasta, tea, coffee, sports drinks, and bottled water. Based on net revenue, PepsiCo is the second largest food and beverage business in the world and the largest in North America.
- Founded in: 1965
- Headquartered in: Purchase, Harrison, NY
- CEO: Ramon Laguarta
- Number of employees: 263,000
- Market Cap: $168.02 bn - EV: $194.88 bn
- LTM Revenue: $67.16 bn - LTM EBITDA: $12.88 bn
- LTM EV/Revenue: 2.90x - LTM EV/EBITDA: 15.13x
Company Details (Target - Rockstar Energy)
Rockstar is a company that produces energy drinks in 30 flavors at convenience and grocery stores in over 30 countries. Since its creation in 2001, Rockstar has grown to occupy a significant portion of the U.S. energy drink market. Rockstar supports the “Rockstar lifestyle” through action sports, motor sports, and live music and advertising their bright and distinctly colored cans. Rockstar sponsors various music festivals, athletic competitions, and action sports competitors.
- Founded in: 2001
- Headquartered in: Las Vegas, Nevada
- CEO: Russell Weiner
- Number of employees: 450
- Market Cap: NM - EV: NM
- LTM Revenue: $190.68 mn - LTM EBITDA: NM
- LTM EV/Revenue: NM - LTM EV/EBITDA: NM
Projections and Assumptions
On the date of the announcement, PepsiCo. shares dropped 3.8% to $129.75. It is important to mention that the S&P 500 index dwindled by 3.4% on the same day, amid accentuated fears over the coronavirus pandemic and the price volatility of oil. The 2.4% decrease with respect to the market average may derive from investors’ worries over the continuous decrease in market share of the target and the additional $700m payments of tax benefits that were assumed by the acquirer.
Instead of acquiring better-performing Monster Beverage (with a market capitalization of $32.07bn plus premium), PepsiCo. decided to place its odds on the smaller Rockstar for a price equivalent to 3 times the target’s revenue figure, despite decreasing market share over the 2017 – 2019 period. Moreover, there has been a commercial agreement since 2009 between the two companies to leverage PepsiCo.’s distribution and supply chain expertise for the Rockstar energy drinks. The deal will absorb the agreement and will eliminate any legal loopholes on which Rockstar could have sued PepsiCo. requiring exclusivity and non-competition against the already-existing PepsiCo energy brands (Mountain Dew Kickstart, GameFuel, AMP).
Long Term Upsides
Mintel market data shows that the total energy drink sales in the US expanded by 29.8% in the last 7 years, with predicted sales in 2019 amounting to $13.5bn. Seeing such a surprising growth for an underexploited market, both PepsiCo. and its rival Coca-Cola Company tried to extend their production and distribution capabilities. Coca-Cola concluded a legally disputed distribution agreement with Monster Beverage and developed its own Coke Energy, while PepsiCo. didn’t scout the markets for any sizable opportunities. Considering the historical data and predicted shift of consumer preferences from sugary, fizzy drinks (sodas) and towards tea and coffee to water of both still and sparkling varieties, the Rockstar formula seemed as an attractive option.
While the Rockstar brand has not had a very strong presence on the east coast or outside the US, PepsiCo. has global value chains and worldwide capabilities. Looking in perspective at the deal rationale, PepsiCo. bought Rockstar for a lower price and lower market share only to be able to ramp it up via its established production, delivery and marketing knowledge and network. The Rockstar brand is built around zero-calories, zero-sugar beverages with high caffeine and derivate ingredients. Adding this portfolio of products to the already established beverages, PepsiCo. can diversify strategically to meet consumer demand much more easily. Nonetheless, the consumers of these energy drinks are mostly millennials, reinforcing PepsiCo.’s focus on this segment with affordable and accessible beverages. Since energy drinks are associated with sports events and shows, companies normally invested in advertising and endorsements for these particular activities; to retain the current client base and gain additional market share by promoting the bundle of beverages, the acquirer will have to reinterpret the marketing and offering strategy to better address and target differentiated customer bases.
Risks and Uncertainties
PepsiCo’s $3.85 billion acquisition of Rockstar displays a strategic diversification into the functional beverage market following their similar acquisitions of Sodastream and Pioneer Food Group. Although this decision compliments the current consumer trend to avoid sugary sodas, PepsiCo faces many risks in their decision to acquire Rockstar. To start, energy drink sales were up 12% through December 2019, while Rockstar’s core line dropped 3.6% and sales of Rockstar Pure Zero were down 9.1% during the period. Rockstar has slowly been losing hold of the energy drink industry as their total share is now fourth behind Bang, Monster, and Redbull. It is alarming that the sales of Rockstar Pure Zero dropped the most as the zero sugar drink market is the main area in which PepsiCo wishes to capitalize through the acquisition. PepsiCo will likely be forced to innovate on top of the rockstar platform in order to compete. The energy drink market has also become increasingly competitive as demand continues to grow. For example, Coca-Cola has released their own line of energy drinks: Coca-Cola Energy. Similarly, energy drinks continue to evolve as the demand for health-focused drinks grows. Many new energy drinks are infused with health supplements such as BCAAs and nootropics. It is easy to fall behind in such a rapidly developing market. All in all, PepsiCo’s acquisition of Rockstar could prove to be ineffective if they are not able to innovate and adapt to the rapidly changing consumer preferences in beverages.
“With Rockstar underneath their wings, they’ll have a family of energy drinks... they can coordinate the activity of an entire family of brands to meet a variety of needs of people.” - John Boylan, Edward Jones Analyst