Pepsi gets the cream with $5.4 bln Russian deal

December 2, 2010

By Jason Bush and Chris Hughes
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

MOSCOW/LONDON — At last, some refreshing news about the movement of overseas capital to Russia. PepsiCo has agreed to buy a two-thirds stake in juice and dairy group Wimm-Bill-Dann, and is making an offer for the rest in a deal valuing the enterprise at $5.4 billion. It’s one of the largest ever foreign investments in Russia. Despite the country’s notoriously tricky climate for outsiders — just consider TPG’s violent travails with its investment in Lenta supermarkets — Russia’s nascent consumer market still holds attractions for acquisitive global companies.

Pepsi is familiar with the local risks. In the 1970s, it became the first western multinational licenced to produce in the Soviet Union. It paid $2 billion in 2008 to buy Russia’s largest juice maker, Lebedyansky. The economy has struggled of late, dragging down both the rouble and Wimm-Bill-Dann’s sales. But things have turned and the company’s revenue is now expected to climb 20 percent in dollar terms in the current year.

Even if the timing looks opportunistic, the deal still isn’t cheap. The 32 percent premium being offered over WBD’s pre-bid market value may not sound rich for an M&A deal. But taking WBD’s own forecast of $334 million of EBITDA for 2010, the acquisition has a heady forward enterprise multiple of 16 times. The return on investment in year one would be only about 3 percent, assuming the group hits its expected $2.6 billion of revenue and holds operating margins at last year’s level. The projected $100 million of synergies aren’t expected to be fully realised until 2014.

The longer-term opportunities may justify the outlay. At least by pouncing now, Pepsi is striking at a time when animal spirits — and therefore the risk of rival interest — is low. Russia’s consumer market is benefiting from changing tastes and lifestyles, not simply rising disposable incomes. WBD originally focused on fruit juice, where its runaway success in the 1990s was an early example of the huge potential for western-style consumer brands.

More recently, the company has diversified into dairy products and become a market leader. Yoghurt was virtually unheard of in Soviet days, but as Russians emulate western lifestyles, demand has taken off. Even so, the average Russian still consumes less than half the amount of yoghurt and fruit juice as an average American or Pole. With Pepsi’s marketing might, it shouldn’t be hard to make this pricey deal pay off.

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