By Niclas Hallberg, Harvey George (LSE) 17/09/2018 |
Overview of the deal
Acquirer: PepsiCo, Inc.
Target: SodaStream International Ltd.
Estimated value: $3.2bn
Announcement date: 20/08/2018
Acquirer Advisors: Goldman Sachs, Centerview Partners
Target Advisors: Perella Weinberg Partners
Pepsi is set to pay $144 per share in cash, representing an 11% premium at the time of announcement. The deal comes only days after Pepsi’s main competitor, Coca-Cola, made a move to acquire a minority stake in sports drink producer BodyArmor, a few weeks after Pepsi’s current CEO Indra Nooyi announced her departure from the company scheduled for later this year. With consumer preferences shifting away from sugary, carbonated beverages, and even diet drinks over concern of artificial sweeteners, Nooyi had been long pushing Pepsi into healthier product territory. This is illustrated by the 2001 acquisition with Quaker Oats, giving Pepsi a range of healthy breakfast and snack brands, but most importantly access to Quaker Oats subsidiary, Gatorade and its prevalent sport-drink. Coca-Cola has long tried to break Gatorade’s grip on the sport-drink market, and their latest investment in BodyArmor is a further attempt at this. Acquiring SodaStream is a further response to these changing market conditions and looks to strengthen the healthy section of Pepsi’s brand portfolio.
“Indra Nooyi is betting on a razors-and-blades kind of business model to reanimate revenue growth that has been waning due to weak demand for traditional sugary soft drinks. SodaStream sells machines used with compatible carbon dioxide capsules and optional flavored syrups, and its success in locking in customers allowed it to recently raise its full-year outlook.” -Thomas Mueller, Bloomberg
Company details (PepsiCo, Inc.)
PepsiCo (Pepsi) is a US multinational food, snack, and beverage corporation formed by the 1965 merger of the Pepsi-Cola Company and Frito-Lay, Inc., which has Lay’s chips and Doritos, among others, in their brand portfolio. After further growth and expansion PepsiCo today stands as the second largest food and beverage company globally.
- Founded in 1898, headquartered in New York, US - Chairman and CEO: Indra Nooyi - President: Ramon Laguarta - Number of employees: 263,000 - Market Cap: $158.42bn - EV: $180.82bn - LTM Revenue: $64.42bn - LTM EBITDA: $12.77bn - LTM EV/Revenue: 2.81x - LTM EV/EBITDA: 14.17x
Company details (SodaStream International Ltd.)
SodaStream is a manufacturing company based in Israel, producing their widespread ‘SodaStream’ home carbonation device, alongside complementary flavouring used with the device.
- Founded in 1991, headquartered in Airport City, Israel
- CEO: Daniel Birnbaum
- Number of employees: 2,492
- Market Cap: $3.24bn - EV: $3.06bn
- LTM Revenue: $612.57mn - LTM EBITDA: $124.08mn
- LTM EV/Revenue: 4.99x - LTM EV/EBITDA: 24.62x
Projections and assumptions
Pepsi has vowed to keep SodaStream as a standalone unit, in an attempt to “keep growth, maintain the culture and not stifle the organisation with corporate types of restrictions”. Hence, no sweeping short-term organisational changes will take place besides efforts and investments to increase the complementarity of SodaStream with Pepsi’s current brands, which either way will be an ongoing process continuing into the long-term.
The most important short-term factor will be the ability of SodaStream to tap into Pepsi’s large distribution network in North America, where their products are currently performing relatively poorly compared to their main destination market: Europe. This, paired with the fact that health trends are felt strongly in stereotypically healthy America, where bottled water overtook soft drinks in sales as of 2016, makes this a potentially fertile market that could start bringing successful growth for SodaStream under Pepsi at an early date.
PepsiCo announced that it launched a new operating entity called The Hive, tasked with developing and supporting new and emerging brands. Considering that SodaStream presents another springboard for such opportunities one can infer that PepsiCo will focus directly on leveraging the new avenues for product development that this deal opens up. Furthermore SodaStream’s healthy as well as environmentally friendly image will work to enhance Pepsi’s own rebranding attempts.
Over the very long-term SodaStream does not only have potential high growth opportunities in America, but also in Asia and developing markets, which are in fact key drivers for the bottled water market. At this stage the general inaccessibility of clean tap water presents a big hurdle to SodaStream; however as infrastructure improves in this area of the world they may turn to SodaStream as an economic alternative to buying bottled carbonated water.
The most interesting aspect of this deal lies in how the short-to-mid-term product development work pans out in the long-term. In February Pepsi launched their new bottled sparkling water brand, Bubly, a product for which the SodaStream is a direct substitute in the short-term. However, considering the fact that SodaStream holds a cost-based comparative advantage to its own brand, Bubly, it certainly will to other competing brands too. Hence it is quite likely that Pepsi may want to, over the long-term, phase out their sparkling water in favor of SodaStream to give them a greater competitive advantage. Coupled with this lies the potential for complementarity with Pepsi’s multitude of carbonated beverages, potentially enabling them to, sometime in the future, sell only Pepsi flavouring capsules that consumers carbonate with water at home. If this were to be achieved then PepsiCo would benefit enormously from dramatically lower storing, shipping, and production costs. The value of this transaction lies in such a potential solution, one that would allow PepsiCo to boldly wear an image of healthiness while still maintaining its soda brands, putting the choice in consumers’ hands.
Risks and uncertainties
The deal is expected to close in January 2019. Before that can occur SodaStream’s shareholders need to vote in favour of it, and then receive approval of regulatory authorities. As a cross-border deal, it needs to be approved by several antitrust bodies, however, despite this the risk of any intervention should be relatively low considering that SodaStream and PepsiCo are not direct competitors. Furthermore, the size difference between the two also weighs heavily in favour of regulatory approval.
Further uncertainty lies in whether PepsiCo will be able to effectively implement the potential complementarity of SodaStream and the rest of their product offering. While this is an uncertainty present in many transactions it becomes especially important in this case because of the tension between Bubly and SodaStream, as well as SodaStream as a health product and Pepsi’s sugary beverage offering. It is especially crucial, if the value potentially generated from this deal is to be realised, that Pepsi does not simply transfer its current customers towards SodaStream at the expense of their soda products, but instead integrates SodaStream to grow both customer bases.
As a footnote it is also relevant that SodaStream actually has been involved in controversial news, specifically as it was publicly forced by protesters to close a factory in 2014 because of claims that the factory was on “occupied territory”.
We are honored to be chosen as PepsiCo's beachhead for at home preparation to empower consumers around the world with additional choices. I am excited our team will have access to PepsiCo's vast capabilities and resources to take us to the next level. -David Birnbaum, SodaStream CEO
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