Stock Swap Increases Pepsi’s Competitiveness in China
Last week, PepsiCo (NYSE: PEP) finalized a deal to swap its 24 bottling operations in China for a 5% stake in Tingyi-Asahi with options for up to 20%. Tingyi-Asahi, a maker of bottled water, tea and juices, is the beverage subsidiary of Tingyi Holdings, a leading Chinese producer of noodles, baked goods, and beverages [1]. Under the agreement, Tingyi-Asahi will become PepsiCo’s franchise bottler in China for carbonated soft drinks and Gatorade, as well as co-branding some products under the Tropicana label. This will help give Pepsi an edge over rival Coca-Cola (NYSE:KO) in the Chinese market.
Chinese Beverage Market
Pepsi is currently fourth in the Chinese market, with 5.5%. Perennial rival Coca-Cola is the leader, with 16.8% of the market, followed by Tingyi at 14.4% and Hangzhou Wahaha Group at 7.2% according to research by Euromonitor International [2]. Pepsi plans to invest $2.5 billion in China over the next three years, compared with Coca-Cola’s planned $4 billion investment. Both companies expect heavy competition in the world’s fastest-growing beverage market, where they have both been enjoying double-digit growth.
Pepsi in China
By divesting itself of the bottling operations, Pepsi is streamlining and concentrating on its core beverage product. The bottling operations led to an after-tax loss of $45 million in 2009 and $176 million in 2010 [3]. Furthermore, the alliance with Tingyi will increase Pepsi’s bottling and distribution capabilities within China thereby allowing deeper market penetration more quickly. The Tingyi-Asahi stock and options included in the deal have the potential to increase Pepsi’s bottom line with minimal effort on their part. The deal is currently value at $257 million, according to current market prices.
Though the Trefis analysis reveals that Pepsi itself only constitutes 6.47% of the PepsiCo Stock price, the combined sales of all the drink divisions account for 48.4% of the price allowing for a much larger impact from the Tingyi deal. The size of the home US carbonated soft drink market shrinks and Pepsi’s share of the market declines, the soda maker must find other ways of increasing the sales of it’s namesake product.
Trefis currently values PepsiCo at $71.30, a 14% premium over the current market price.
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Notes:- Yahoo Finance, http://finance.yahoo.com/news/PepsiCo-swaps-China-bottling-apf-1342303746.html;_ylt=Agm0jwpTZDMxwfNDbWVjnZoSbq9_;_ylu=X3oDMTFlbG1wcTZkBHBvcwMxMARzZWMDbmV3c0h1YkFydGljbGVMaXN0BHNsawNwZXBzaWNvc3dhcHM-?x=0 [↩]
- Bloomberg, http://www.bloomberg.com/news/2011-11-04/tingyi-to-buy-pepsico-s-china-operations-tingyi-executive-says.html?cmpid=yhoo [↩]
- Wall Street Journal, http://online.wsj.com/article/SB10001424052970203716204577016743059903710.html?ru=yahoo&mod=yahoo_hs [↩]