Pepsi’s SodaStream acquisition won’t solve its biggest problem: fewer people are drinking soda
PepsiCo Inc.’s acquisition of SodaStream International Ltd. continues the soda and snacks seller into healthier categories and opens doors to the at-home beverage-making market, but won’t ultimately solve the core problem that Pepsi faces, according to Wells Fargo: fewer people are drinking soda, period.
Early Monday, Pepsi PEP, -0.71% announced that it will acquire the Israel-based company, which manufactures and distributes a device that allows customers to make sparkling water and other carbonated drinks at home.
Pepsi has agreed to acquire SodaStream SODA, +0.53% for $144 per share, or $3.2 billion.
The deal continues Pepsi’s move away from sugary beverages and has an environmental component, with SodaStream’s reusable bottles reducing waste.
“SodaStream is highly complementary and incremental to our business, adding to our growing water portfolio, while catalyzing our ability to offer personalized in-home beverage solutions around the world,” said Ramon Laguarta, Pepsi’s CEO-elect, in a release statement.
Wells Fargo analysts look back at another deal and see similarities.
“[W]e can’t help but see parallels to Coca-Cola’s KO, -0.67% decision to acquire a stake in Green Mountain in 2014, and question whether this deal — which also brings together a large consumer packaged goods company and an in-home beverage maker — will do much to solve Pepsi’s ongoing struggle to improve volumes in its North American Beverage segment (which, despite sequentially improving in Q2, remain weak),” the note said.
On July 11, Pepsi reported second-quarter earnings, saying that North America Beverages experienced a 16% operating profit decline.
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Outgoing Chief Executive Indra Nooyi said the Pepsi brand “continues to make progress towards more stable performance” with continued investment.
“At the same time, we remain laser-focused on higher growth categories with appropriate brand investment and robust innovation,” she said, according to a FactSet transcript. “For example, Bubly, a cleverly marketed new entrant in the fast-growing sparkling water segment, launched earlier this year and it continues to perform exceedingly well.”
Wells Fargo maintained its market perform stock rating despite the acquisition.
“In short, we remain concerned about challenges facing Pepsi’s core business and, as such, continue to see limited upside for Pepsi in the near term,” the note said.
Wells Fargo does see the deal as a way to further diversify Pepsi’s products and channels, giving the company an in with the in-home beverage category.
GlobalData’s senior consumer insights analysts Melanie Felgate, thinks giving consumers the chance to recreate Pepsi beverages at home could be a draw. Moreover, the deal could give SodaStream a boost.
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“Although long established, SodaStream has remained a relatively niche brand, but with the backing of a global soft drinks giant there is an opportunity to propel the concept mainstream,” she wrote.
“SodaStream allows consumers to customize their own beverages to create not only flavors — but potentially sugar levels — to suit their needs, helping PepsiCo better meet consumer’s needs for products which are not only healthier but do not compromise on taste.”
PepsiCo shares closed Monday down 0.1%, and are down 5% for the year to date. SodaStream shares gained 9.4% Monday, and are up 103% for 2018 to date.
The S&P 500 index SPX, +0.54% is 7.4% for 2018 to date.
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