PepsiCo buys SodaStream for USD 3.2 billion
Why now? PepsiCo is splashing out a bubbly USD 3.2 billion for the Israeli company SodaStream, a manufacturer of sparkling water kits. The transaction was announced on 20 August 2018. By our read of the numbers the outlay is about 30 times SodaStream’s profits (EBITDA).
PepsiCo and SodaStream have co-operated before. They trialled some Pepsi flavours in 2014 which did not taste nice. If PepsiCo was so keen on SodaStream, why did they not buy it at the beginning of this year, when its share price was only USD 70? Instead PepsiCo is now paying USD 144 per share, an eleven percent premium to SodaStream’s previous closing price.
SodaStream was founded in England in the early 1900s, became part of the Cadbury-Schweppes conglomerate in 1985 and became an Israeli firm in 1998 when Cadbury sold it to its Israeli distributor. SodaStream went public at USD 20 a share on the Nasdaq in 2010. An early investor would have made a nice return.
Today, SodaStream is active in more than 45 countries, where people have learnt that making their own bubbly water is considerably cheaper than buying plastic bottles of water and more convenient than schlepping them home from the shop, perhaps even up a few flights of stairs.
However, western Europe makes up roughly 60 percent of its sales, which indicates it does not have much of a presence in the US or in Asia where consumers prefer to buy bottles instead of engaging in DIY production.
SodaStream’s business model is the same that printer producers have been using for long. First, you sell the consumer a starter kit consisting of the machine, a CO2 cartridge, some empty bottles and maybe a flavour syrup. Having got the consumer thus hooked, you hope that the consumer will continue to buy CO2 refills and syrups to add to the carbonated water.
For this model to be profitable, the kit buyer is the lifeblood of the company as consumers will need to purchase the refills and flavours. These are the high margin products, not the kits. Luckily, after a two-year slump, SodaStream saw two years in a row when the number of their kits sold has increased, indicating a growing user base.
Despite the high price, SodaStream is too small to give PepsiCo’s turnover or profits much of a boost: about USD 630 million in sales versus PepsiCo’s USD 63.5 billion in its past year. This equates to roughly one percent of PepsiCo’s turnover.
There could be two reasons why PepsiCo decided to jump on the bandwagon of kitchen-top appliances: Firstly, younger consumers are more into convenience than their elders and secondly, packaged water is a growing segment in the United States. It picked up seven percent in 2017, according to the Beverage Marketing Corporation. Time for PepsiCo to tackle the water segment from another angle?
It will be remembered that in 2017 brewer AB-InBev and coffee purveyor Keurig Green Mountain formed a joint venture to develop an in-home system that would make beer, cocktails and other alcoholic beverages. The machine is not available yet. It is likely that AB-InBev suddenly had second thoughts. Because a few months after the Keurig announcement, AB-InBev, through ZX Ventures, took a minority stake in PicoBrew, a countertop homebrewing appliance often mocked as “Keurig of homebrew.”
