Here’s Why PepsiCo Might Be Looking To Acquire KeVita Inc

Reports suggest that PepsiCo (NYSE:PEP) is nearing a deal to acquire KeVita Inc, a sparkling probiotic U.S. drinks company. PepsiCo already holds a minority stake in KeVita, which sells vinegar tonics, master brew kombucha tea and sparkling probiotics (which are considered to be digestive aids). As PepsiCo looks to diversify its portfolio of drinks to appeal to the health conscious customers, this acquisition can enhance the company’s health drinks offering. According to a report by Markets and Markets, the global probiotics market is likely to grow at a CAGR (compounded annual growth rate) of nearly 7% between 2012 and 2017 and is expected to reach around $24 billion by 2017. As growth in the carbonated soft drinks market slows down, PepsiCo’s strategy to diversify its portfolio and focus on healthy drinks will be a key revenue driver in the long term. Acquisitions that can enable this diversification, such as the rumored one with KeVita, will be critical for the company’s long term growth.

Minor Acquisitions Can Drive Portfolio Diversification

KeVita is likely to be valued at $500 million for its acquisition by PepsiCo. While this acquisition will not be significant in terms of value, it can give PepsiCo the much needed diversification in its beverage portfolio. Given its huge snacks division, the company is already hedged against the decline in the carbonated soft drinks (CSD) market. With healthy beverages under its umbrella of offerings, PepsiCo can reduce dependence on CSDs significantly.  According to our estimates, PepsiCo’s soft drinks division accounts for around 13% of its valuation and we expect the company’s market share in the global CSD market to remain steady at around 20% over our forecast period.

Given PepsiCo’s investments in emerging markets, which will account for the growth in the CSD market going forward, the company is likely to maintain its share in this segment going forward. However, other beverages such as sports drinks and healthy beverages are likely to witness faster growth going forward. Pepsi’s strong presence in these segments is likely to be a key revenue driver for the company. According to our estimates, PepsiCo’s market share in the sports drink segment (Gatorade and other beverages) will increase from around 12.7% in 2016 to 14.0% by the end of our forecast period. We also expect the global sports and energy drinks market to increase rapidly from $86 billion in 2016 to $155 billion by the end of our forecast period.

PepsiCo’s focus on healthy drinks is crucial for its long term growth. While the company is taking initiatives such as introduction of organic Gatorade and the “Hello Goodness” vending machines, minor acquisitions such as the one of KeVita can rapidly enhance the company’s healthy beverages portfolio. We believe as consumers shift preferences and look at adapting healthier lifestyles, PepsiCo’s strategy to diversify its portfolio through small acquisitions can be a key growth driver in the long term.

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