Why Is PepsiCo Paying Such A High Price For SodaStream?

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As the beverage industry undergoes a transformation with carbonated soft drinks losing their position and consumers preferring “healthier” beverages, cola giants have focused their attention on other avenues to spur their sales. One such route is the sparkling water category which has witnessed spectacular growth rates. The market for sparkling water is set to continue its strong growth in the next few years, driven by the introduction of new and innovative flavors, as well as its image as a healthy alternative to carbonated drinks. The Coca-Cola Company (NYSE:KO) and PepsiCo (NYSE:PEP) have to play catch-up to established brands such as Perrier, San Pellegrino, and National Beverage’s LaCroix brand. While Coca-Cola announced the acquisition of premium sparkling mineral water brand Topo Chico in the beginning of October 2017, PepsiCo launched its own sparkling water brand called Bubly. Given the enormous interest in this space, PepsiCo’s $3.2 billion acquisition of SodaStream (NASDAQ: SODA), the number 1 sparkling water brand by volume in the world, and the leading manufacturer and distributor of Sparkling Water Makers, does not come as much of a surprise.

We have a $122 price estimate for PepsiCo, which is higher than the current market price. The charts have been made using our new, interactive platform. You can modify the different driver assumptions by clicking here for our interactive dashboard on Our Outlook For Pepsi In 2018, to gauge the impact on the revenue, earnings, and price per share metrics. We have also created an interactive dashboard on Our Outlook For SodaStream In 2018 which shows the expected revenues and the P/E multiple used to reach the $144 per share acquisition price for the company. If you don’t agree with our forecast, you can modify the drivers to attain your own fair price for the company.

Tremendous Scope For Growth In The Sparkling Water Market

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Sales of sugary, carbonated beverages have been on the decline for a while now, with consumer preferences tilting towards more healthier options such as teas and flavored waters. Diet drinks, which were once considered healthy, have received a lot of flak with increasing concerns about the dangers of artificial sweeteners. This shift away from carbonated drinks and diet sodas has precipitated the growth of the sparkling water category. Given that nationally, sparkling water has been growing at a much higher rate than the overall bottled water segment, 38% growth last year, compared to 7% for the whole category, it is definitely a significant market for PepsiCo to ply its trade. This tremendous growth is expected to continue in the future as well, as the soda sales contract, and consumers look toward sparkling water to satisfy their cravings for carbonation.

For PepsiCo, SodaStream can be expected to form only a small portion of the North American Beverage revenues, once the acquisition is complete, given the fact that the latter has a very small presence in the U.S. This will result in a lower level of cannibalization for PepsiCo given the similar products offered by both companies. Looking ahead, SodaStream will be able to leverage PepsiCo’s massive distribution network to expand its presence in North America.

SodaStream also makes countertop machines that enable consumers to easily transform ordinary tap water into sparkling water and flavored sparkling water. By marketing these products as ones that promote health and wellness, the company has been able to capture a significant market share. According to the company, once a consumer purchases its Sparkling Water Maker for roughly $60, the spending doesn’t stop there. Assuming a 10-year lifetime of the machine, approximately $40 per year is expected to be spent every year on accessories such as exchangeable CO2 cylinders, carbonation bottles, and flavors, taking the total revenue from a single unit to $460.

The company is also marketing its products on their environmentally friendly nature. The company sells reusable bottles, reducing the plastic waste, which holds a significant appeal to a number of consumers concerned about the escalating waste from plastic bottles and soda cans. Under CEO Indra Nooyi, PepsiCo has also been focusing on becoming more resource efficient and minimizing its environmental impact.

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