Pepsi Buying Russian Juice Maker
March 24, 2008
According to CNN, PepsiCo and its biggest bottler said recently that they are paying $1.4 billion to buy a majority stake in Russia''s biggest juice company, a deal that expands their non-cola drinks business in a key growth market outside the U.S.
That price tag for juice maker JSC Lebedyansky makes it PepsiCo Inc.''s biggest acquisition since it bought The Quaker Oats Co. for $14 billion in 2001 and its biggest foreign acquisition ever, PepsiCo International Chief Executive Mike White said.
He said the deal fits two criteria important to the company: building its portfolio of healthier products and getting market share in the quickly growing markets of Brazil, India, Russia and China.
PepsiCo, the second-biggest U.S. soft drink company and maker of Frito-Lay snacks, and bottler Pepsi Bottling Group Inc. will buy a 75.5% stake in Lebedyansky from the company''s four biggest individual stockholders. Once the deal closes, the two companies will offer to buy the remaining shares, as required by Russian law. They could end up owning all the shares.
Last year, a report by Moscow''s Troika Dialog investment bank said Russia''s market for fruit juice and beer is expected to become Europe''s biggest by volume in 2008. White said Lebedyansky is the biggest juice maker in Europe and the sixth-largest in the world. It holds 30% of the market share in Russia, where the volume of juice consumed grew an average of 15% a year from 2001 to 2006.
Coca-Cola also owns a Russian juice maker, Multon, which it bought in April 2005. At the time, Multon had a market share in Russia of about 25%. Coca-Cola spokesman Dana Bolden said Thursday that it is the No. 2 juice brand in Russia.
PepsiCo Chief Executive Indra Nooyi has said the company has a "robust" acquisition pipeline that it will use to expand its product portfolio to include additional healthier snacks and drinks. It sells brands such as Doritos, Cheetos, Lay''s, Mountain Dew, Gatorade and Tropicana. Other recent acquisitions include the Ukraine-based juice maker Sandora, New Zealand-based Bluebird snacks and Izze and Naked Juice in the U.S.
PepsiCo has a decades-old relationship with Russia that dates to when Soviet Premier Nikita Khrushchev tried Pepsi for the first time in 1959, when then-CEO Donald Kendall traveled there for an exhibition of American products. In 1974, the company opened a Pepsi-Cola bottling plant in Russia, making it the first Western-branded consumer product to be produced in the country. Today, PepsiCo and PBG together employ more than 7,000 workers in Russia.
White, who speaks Russian and was once an exchange student there, said the company has excellent working relationships in the country.
Still, Morgan Stanley analyst Bill Pecoriello said the deal presents some challenges.
Lebedyansky lost market share last year because of a failed advertising campaign. "PepsiCo may need to step up brand support in order to drive share stabilization and growth," he told investors in a research note.
And the juice industry, Pecoriello said, faces shrinking margins, because of higher costs to store and transport products.
But he said PepsiCo could ultimately benefit from greater exposure to Russian consumers.
JSC Lebedyansky had 2007 annual revenue of about $800 million from its juice operations. PepsiCo''s purchase price gives the entire juice business a value of roughly $2 billion.
The deal is subject to the spin-off of Lebedyansky''s baby food and mineral water business to its shareholders as well as regulatory approvals. It is not expected to close before the third quarter. Pecoriello notes that the approval of the spin-off is not guaranteed.
Purchase-based PepsiCo and Pepsi Bottling said they bought another Russian drinks company, the soft drink maker Sobol-Aqua JSC, through a joint venture. Terms were not disclosed.