Big M&A news hit the beverage space this morning as
SodaStream (SODA 142.35, +12.50, +9.63%) has agreed to be acquired by PepsiCo (PEP 114.99, +0.03, +0.03%) for $144 per share
in cash in a deal valued at $3.2 bln. The acquisition has been unanimously
approved by the Boards of Directors of both companies. Closing of the deal is
expected by January 2019. The deal represents just an 11% premium to SODA’s
Friday closing price of $129.85, but it's a 32% premium to the 30-day volume
weighted average price of those shares.
PepsiCo sees the combination as an inspired match. SodaStream’s unique product range, says PepsiCo, will add to PEP’s growing water portfolio in complementary and incremental ways, catalyzing PEP’s ability to offer personalized in-home beverage options globally. The acquisition joins nicely with other PepsiCo strategies geared toward innovating to reach customers “beyond the bottle”. Other developments and technologies serving that pursuit have included the company’s flavored Drinkfinity pods venture; the Pepsi Spire, a touch screen soda fountain provided for food service industries; and Aquafina water stations, which can dispense flavored still or sparkling water into refillable containers, offered at workplaces and colleges. Each of these, in affirmation of PepsiCo’s stated Performance with Purpose initiative, enhance a consumer’s ability to customize his or her beverage choice at manageable costs while lessening the ecological impact associated with traditional cans and bottles.
SodaStream, meanwhile, expresses excitement about the combination and looks forward to taking the SodaStream team to the next level using PepsiCo’s capabilities and resources.
In case you're not familiar with SodaStream, it's the world's largest manufacturer of home beverage carbonation systems. Initially focused on carbonated sodas, the company had difficulty penetrating the U.S. market. It turned out that U.S. consumers were largely uninterested in making their soda at home. SODA was also hurt by evolving consumer taste, as sugary sodas lost ground to more health-conscious options, and the company was further hurt because SODA's at-home soda just didn't taste that good.
In response, SODA made a big change a few years ago: it repositioned itself as a sparkling water brand. Its re-named Sparkling Water Makers enable consumers to easily transform ordinary tap water into sparkling (carbonated) water and flavored sparkling water in seconds.
SODA's at-home system offers several advantages: 1) convenience (no heavy bottles or 12-packs; lesser storage space requirements; no empties to recycle), 2) cost effectiveness (saves up to 70% for sparking water), 3) relative healthiness (no high fructose corn syrup), and 4) eco-friendliness (avoids pollution from discarded cans and bottles). Beyond just earning profits from sales of water makers, SODA's business model creates a recurring revenue stream, as consumers need to purchase consumable gas refills and flavor packets.
PepsiCo’s business encompasses a lot more than just its flagship soda brand. In addition to Pepsi, the #2 soft drink, the company owns Mountain Dew, Mug, and Sierra Mist. Looking beyond soda, PEP also owns Tropicana orange juice, Gatorade sports drink, Naked Juice, Lipton teas, and Aquafina water. Looking beyond beverages altogether, PEP also counts Frito-Lay, the world's largest snack maker, with offerings such as Lay's, Tostitos, Sun Chips, Doritos, Ruffles, and Cheetos, among its subsidiaries. PepsiCo’s Quaker Foods unit sells breakfast cereals (Cap’n Crunch, Life, Quaker Oatmeal), Aunt Jemima mixes and syrups, Rice-A-Roni side dishes, and more.
What in particular would draw PEP to SODA as its next portfolio expansion? A main reason that the business is appealing is that carbonated soda sales have been slumping for the past few years while sparkling water has quickly become popular with consumers; it has been presented as a healthy alternative to carbonated sodas, less laden down by the higher calorie counts, artificial flavors and colors, and caffeine found in sodas. Sparkling water brands like LaCroix and Polar Water have taken off in popularity. This deal gives PEP sort of a beachhead for at-home water prep systems, allowing PEP an entry into the popularity and profitability of carbonated water while delivering on PepsiCo’s goals of reaching customers in innovative ways. The Sparkling Water Makers' design will also boost PEP's "eco-friendly" reputation, which has been a goal for them.
With that said, the timing of the deal is a bit surprising to us. PepsiCo CEO Indra Nooyi announced just a couple of weeks ago that she plans to step down on October 3. PepsiCo's global operations chief Ramon Laguarta will take her place. It's a bit unusual for a company to make an acquisition as large as this during a CEO transition period, but they probably have been considering this move for some time. On a final note, it will be interesting to see if this acquisition will strengthen recent calls by major investors to separate the snacks division from the beverage division.
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