Having already announced her retirement and replacement, PepsiCo (NYSE:PEP) CEO Indra Nooyi has announced one more thing, the $3.2 billion acquisition of SodaStream (NASDAQ:SODA).
The price, $144 per share, is a 12% premium over SodaStream’s Aug. 17 close of about $129, and the deal is expected to close in January. It’s an all-cash transaction.
SodaStream, which produces soda machines for the home, suffered severe growth hiccups in the middle of this decade as it tried to get into hot drinks, but sales for 2017 were a record $543 million, and it was exceeding that pace through the first quarter of the year, with expanding profitability.
Pepsico, meanwhile, opened Monday at about $115.50 per share.
Carbonation: A Logical Game
SodaStream, which is based in Israel, saw its stock crushed mid-decade, from a high of $68 per share in 2014 to a low of $14 in 2016. Before acquisition talk heated up, it was trading at about $88 per share. Its comeback was based, in part, on emphasizing that the machine makes carbonated water, not just soda, as fizzy non-caloric drinks took hold in the market.
Analysts seem to be cheering the news, confident that Pepsi’s global distribution will quickly increase sales and gain share against National Beverage (NASDAQ:FIZZ), creators of the LaCroix brand of carbonated drinks, which has a market cap of $5.4 billion.
Before the SodaStream deal was announced, some analysts were beginning to sour on Nooyi, noting that returns on the stock had been slowing in recent years. Integration of SodaStream will be in the hands of Nooyi’s successor, Ramon Laguarta, a native of Barcelona who worked at candy maker Chupa Chups before joining Pepsi, and who had been running the company’s European and African operations before becoming President in 2017.
New Fizzy Playing Field
The playing field has undergone a major shakeup lately, with the rise of National Beverage, the newly merged Keurig Dr. Pepper (NYSE:KDP), and with Coca-Cola (NYSE:KO) buying Topo Chico last year.
All this change takes place against a stark reality. Soda sales are declining, and have been declining for over a decade. Diet drinks declined most spectacularly, as bottled water sales boomed. Bottled non-soda is supposed to take up the slack, and health researchers are just now starting to get their arms around the wide variety of ingredients in it.
Coke responded to the fall of soda by putting its drinks into smaller containers, building “freestyle” machines that let consumers create their own flavors, and moving to turn its sodas into “slushes” for convenience stores.
Now Pepsi has responded, with its move into fizzy water and home service. It will be up to Laguarta to make SodaStream a global brand, and to prove Nooyi right in her last act as CEO.
The Bottom Line
While Pepsi stock has a premium price to earnings multiple of 35, it’s a solid dividend stock. PEP stock delivered a yield of 3.23% over the last year, increasing the dividend from about 57 cents per share in 2013 to 92 cents back in May.
What were once soda companies are now water treatment companies, and it’s the safety of the underlying product (not the various ways it’s presented) that matters most to consumers.
That may be the biggest risk here …
SodaStream uses your own tap water to produce its product, and if your tap water isn’t safe, neither is the result. Pepsi needs to be careful, and so must its investors.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.
