Coca-Cola, PepsiCo Diverge On Acquisition Spending

Mar.21, 2008 in Market Outlook, Mergers and Acquisitions

NEW YORK (Dow Jones)–PepsiCo Inc. (PEP) and Coca-Cola Co. (KO) are both
aggressive dealmakers. But the beverage giants have forked out acquisition
dollars in diverging ways over the last year, with PepsiCo focusing more on
international deals, and Coke leaning to the U.S.

PepsiCo and its biggest bottler Thursday said they were buying the juice business
of Russia’s Lebedyansky (LEKZ.RS) for $1.4 billion. The deal - the company’s
biggest since its 2001 acquisition of Quaker Oats - added to a string of other
international deals the company has made over the last year.

By contrast, Coke made its biggest acquisition ever last June through its $4.1
billion buy of vitaminwater maker Glaceau, a U.S. business.

Both companies’ acquisition strategies have been influenced by declining sales of
carbonated soft drinks in the U.S., where consumers have been looking for
healthier options.

Pepsi - which already has a strong set of noncarbonated brands like Gatorade in
the U.S. - is looking to offset declines in the U.S. soda market by growing
internationally. On the other hand, Coke - which already gets a big percentage of
its growth from international markets - has been looking to make deals that can
raise its presence in the growing market for noncarbonated and healthier drinks.

Finding a balance between domestic and international growth is important to both
because while North America accounts for a big chunk of their revenue, their
international markets are growing at a faster pace.

PepsiCo and Pepsi Bottling Group Inc. (PBG) on Thursday said they had agreed to
buy a 75.53% stake in Lebedyansky, Russia’s largest juice maker, with around 30%
of the market. The long-rumored transaction, which should close by the third
quarter, excludes Lebedyansky’s baby food and mineral water operations.

PepsiCo’s deal in Russia highlights the company’s push to raise its presence in
international markets, where it has relatively less exposure than Coca-Cola. In
2007, PepsiCo got about 40% of its revenue outside North America, while Coke got
more than 70% from abroad.

“Pepsi, through some recent deals and focus, is making it clear that they are
intent on growing their global beverage business,” said John Sicher, editor of
trade publication Beverage Digest. “Coke has a huge lead in carbonated (soft
drinks) internationally and PepsiCo is aggressively going after other
categories.”

In an interview, PepsiCo International’s Chief Executive Michael White said the
deal will propel Pepsi past Coke in the Russian juice market.”One of our
priorities has been to step up our international growth rate,” he said.

Analysts said the clearest financial benefits to the deal would arrive in the
future.

“The deal is a strategic positive for PepsiCo. Longer-term, though, meaningful
contribution to earnings is likely a few years down the road,” Goldman Sachs
analyst Judy Hong wrote in a research note to clients. She raised her earnings
estimates for PepsiCo for 2011 and 2012 to reflect faster growth from PepsiCo
International.

Don Yacktman, president of Yacktman Asset Management, which owns shares of both
Pepsi and Coke, said, “Ultimately what you want to do is develop an international
franchise. Coke already has it; Pepsi is trying to get there.”

Yacktman said Pepsi and Coke tend to be two of the top three holdings in his
funds. He said he has a bigger position in Coke, but believes both companies are
successful and well-run.

Coke’s most recent acquisitions, meanwhile, seem to have reflected a desire to
play catch-up in an area where it has traditionally lagged, the U.S. market for
noncarbonated beverages. PepsiCo has done well in the market for noncarbonated
drinks in North America, thanks to brands like Gatorade. In addition to the
Glaceau acquisition, Coke recently agreed to buy a stake in U.S. ready-to-drink
tea maker Honest Tea.

“Pepsi’s acquisitions are based more on expanding geographically; Coke’s are more
focused on diversifying their product portfolio,” said Walter Todd, a portfolio
manager at Greenwood Capital Associates, which holds Pepsi shares. “They have
different issues they are trying to deal with.”

To be sure, neither company has stuck to any firm script on making acquisitions.
Pepsi’s White pointed out that the company has made small “tuck in” acquisitions
like Naked Juice Co. in the U.S. Pepsi’s recent deals also include a Bulgarian
nuts and seeds company, and a Ukrainian juice maker. Coke, meanwhile, has also
bought stakes in some international bottlers.

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