A “watershed”. A “significant milestone”. A “unique and transformational opportunity”.
PepsiCo’s senior executives reached for the adjectives yesterday (2 December) when they outlined the company’s move to buy Russian dairy, baby food and juice maker Wimm-Bill-Dann.
The US food and beverage giant plans to first take a 66% stake in WBD for US$3.8bn, then, as stipulated by Russian regulations, launch a tender offer for the rest of the business. The deal as a whole values WBD at $5.4bn.
Over fifty years after PepsiCo first entered the Russian market (the company likes to point the fact that Pepsi cola was the first Western consumer product on sale in the former USSR) the country will become its largest market outside the US.
PepsiCo’s management reeled off statistics to demonstrate the clout of the business in Russia – the combined business will be the country’s largest food and beverage firm, with six of the top 20 brands on sale – and they also pointed to data that they claimed showed the potential of the country’s economy and its dairy sector.
“By 2013 is expected to overtake the UK to become the second largest economy in Europe, behind Germany,” CFO Hugh Johnston told reporters after the deal was announced. “Russia has a rapidly-growing middle class, which is what really drives growth in branded consumer goods.”
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Mehmood Khan, the man appointed to lead PepsiCo’s push further into the dairy sector and in healthier product categories more broadly, moved on to describe Wimm-Bill-Dann’s presence.
“We will now have a very successful, multi-billion dollar, full-line dairy operation in a very attractive market,” Khan said. “This will not only benefit our broader business in Russia and the surrounding region but will also provide a platform building dairy R&D and manufacturing capability.”
Analysts broadly welcomed PepsiCo’s move for WBD. “Strategically, we think the deal makes sense,” said Morningstar analyst Phillip Gorham. “The acquisition gives Pepsi the largest and most developed food and beverage distribution networks and builds out its non-carbonated portfolio in Russia, an important growth market.”
According to data from Euromonitor, the retail value of Russia’s dairy market grew by more than 9% to over RUB545bn in 2009 – a year when the country’s economy slumped into recession. The same figures forecast that the value of the sector could reach over RUB957bn by 2015 – growth over 75% over six years.
Johnston said the “value-added” part of Russia’s dairy sector had grown by 22% “over the last number years” and is projected to grow “in the low- to mid-teens going forward”. In Russia, Khan explained, value-added dairy products include fermented milk, cultured milk and yoghurt, pointed to WBD’s “leadership” in the category and said the acquisition fit PepsiCo’s plan to invest in that part of the dairy industry as it seeks to triple sales of healthier food and beverage products.
“We’ll anchor our dairy expansion in … value-added dairy categories. This means we will have a clear vision of how we will provide added functionality, convenience and branding versus the market’s mainstream commoditised offerings,” Khan explained.
Of course, in Russia and worldwide, PepsiCo is not alone in pursuing this strategy. In Russia, this summer Danone announced plans to merge its fresh dairy operations with local processor Unimilk, creating a business that had annual sales of EUR1.5bn and spanned Russia, Ukraine, Kazakhstan and Belarus.
PepsiCo refused to be drawn on whether the Danone-Unimilk venture and the creation of a strong business in the Russian dairy sector hastened its move for WBD. However, as analysts at Stifel Nicolaus suggested, Danone’s venture was likely to have been a factor in the US group striking now.
The alliance with Unimilk led to Danone selling its 18% stake in WBD and as the Stifel analysts wrote in a note to clients yesterday: “PepsiCo has long been rumored as a suitor for WBD, and we believe the stepping out of Danone helped pave the way to today’s announced transaction.”
Speaking to reporters, Johnston did not make a direct reference to the competition in Russia but instead emphasised what he saw as the attributes of WBD.
“Wimm-Bill-Dann adds to our portfolio of businesses a fantastic operating company, one with leading brands, high growth, attractive margins and deep management capability,” Johnston said. “The acquisition of Wimm-Bill-Dann is a unique and transformational activity for PepsiCo and Europe, in part because we’re acquiring a company with a very impressive business.
He added: “Wimm-Bill-Dann has grown rapidly cross the last decade to become the largest food and beverage player in Russia. It has a powerful portfolio anchored in dairy. It also has an attractive juice business that is highly complementary to our own and more recently, has leveraged its capabilities in dairy and juice to build a leading franchise of nutritious dairy and fruit based snacks and beverages for toddlers and for babies.”
Ali Dibadj, senior analyst at Sanford Bernstein, concurred that the compound annual growth rate in WBD’s “core dairy categories” had been “roughly 20%-plus” since 1998 – and said the Russian firm had gained eight points of market share since 2001 in milk, yoghurt and sour milk.
However, investing in emerging markets like Russia carries risk as well as rewards and PepsiCo shareholders would have been keen to hear from analysts about the prospects for the US group’s expanded business in the country. Dibadj was upbeat.
“Although many US investors are wary of the dairy category – familiar with Dean Foods’ recent struggles – dairy in emerging markets has far more favourable growth and profitability characteristics and PepsiCo has already had positive experiences with the dairy category through its Almarai joint venture in the Middle East,” Dibadj said.
PepsiCo and Saudi dairy firm Almarai Co. set up their dairy and juice venture in the early part of last year, with a focus on south-east Asia, Africa and parts of the Middle East. Since then, the venture has bought dairies in Jordan and Egypt.
The acquisition of WBD is part of PepsiCo’s plan to increase sales of “nutrition” products from a current level of $10bn a year to $30bn in 2020. WBD is PepsiCo’s most significant piece of M&A in the dairy sector and will take its sales of healthy food and drinks to $13bn.
Johnston yesterday tried to play down the prospect of PepsiCo making similar acquisitions and said the company would look to reach the $30bn target through a “combination” of organic growth, ventures and M&A – acquisitions, the PepsiCo finance chief said, were likely to be smaller, or “tuck-in” deals.
Nevertheless, Dibadj believes PepsiCo may have to make two or three more deals that are similar in scope to the WBD transaction to meet its sales target.
“Given today’s now circa $13bn base [in sales of nutrition products] coupled with an expectation of +5-6% normalised organic growth in [those] categories, we expect PepsiCo to pursue perhaps two to three deals of similar size to the WBD transaction over the next five to seven years,” Dibadj said, although he added such a strategy was “by no means an overwhelming requirement”.
So, where could PepsiCo look for the next acquisition? If they find and secure one, prepare to thumb your thesaurus.