Pepsi's SodaStream Buy Sensible, Shares Attractive
The purchase reflects the wide-moat firm's ongoing focus on more natural and nutritious offerings.
Wide-moat Pepsi (PEP) has announced that it will buy SodaStream, the leading manufacturer of home beverage carbonation systems, for $3.2 billion in cash, or $144 per share (roughly 31 times 2017 adjusted EBITDA). From our vantage point, the deal, which is expected to close in January 2019, aligns with Pepsi's recent efforts to build out its water portfolio, including the launch of its Bubly brand sparkling water earlier this year. Further, it reflects the company's ongoing focus on more natural and nutritious offerings. As of 2017, 43% of Pepsi's beverage portfolio volume had 100 calories or fewer from added sugars per 12-ounce serving; it aims to have this fare account for two thirds of beverage volume by 2025. Our view of Pepsi's prudent capital allocation also remains intact, as it had nearly $14 billion of cash on its balance sheet as of June. That said, we don't expect the acquisition to have a material impact on our outlook for Pepsi, given that SodaStream posted just $543 million in sales in 2017, or less than 1% of Pepsi's revenue, and plan for little change to our $123 fair value estimate, which factors in our expectation for 3% top-line growth and high-teens operating margin on average over our 10-year forecast.
While Pepsi's beverage business has posted tepid organic volumes as of late (down 2% in North America and flat globally in the first half of 2018), we've attributed this to the firm underallocating resources to its core beverage brands, including trademark Pepsi and Gatorade, relative to smaller brands rather than a deterioration in the underlying equity of these brands. As evidence, organic volumes in the North American beverage declined 2% in the second quarter, an improvement from the roughly 3% declines over the trailing 12 months, on a 1% improvement in price/mix. We continue to expect improving performance in the back half of the year, as the firm's new product innovations and reinforced brand investments take hold.
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Sonia Vora does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.