PepsiCo Inc. agreed to buy a controlling stake in Wimm-Bill-Dann Dairy & Juice Co. for $3.8 billion helping Chief Executive Officer Indra Nooyi retake the lead in juice and dairy from Coca-Cola Co. in Russia.
PepsiCo will buy 66 percent of Wimm-Bill-Dann and plans to make an offer for the rest, subject to government approvals, the companies said today. The price of $33 per U.S. share is 32 percent more than the average in the past 30 days, they said. |
The deal is PepsiCo’s largest yet to bolster its Russian beverage business, following the 2008 purchase of a majority stake in OAO Lebedyansky, the country’s biggest juice maker. The move makes Russia PepsiCo’s biggest international market and gives Nooyi more ammunition in her Russian duel with Coca-Cola, which also has sought acquisitions in the country to profit from its growing middle class.
“Historically Russia’s been important because it’s a large market and it’s been untapped,” Philip Gorham, a senior equity analyst for Morningstar Inc. in Chicago, said today in a telephone interview. “At the moment it’s your typical emerging- markets play but on a really large scale.” Gorham rates PepsiCo shares as undervalued.
Including assumed debt, PepsiCo is paying 19.8 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. The median multiple for similar deals since 2001 is 9.66 times ebitda, the data show.
Wimm-Bill-Dann, whose brands include Chudo dairy products and Agusha baby food, has almost doubled its sales since 2005. Buying the company will help PepsiCo become the biggest food-and-beverage company in Russia.
In 2009, PepsiCo and Wimm-Bill-Dann together had 42 percent of Russian juice sales by volume, according to data from Euromonitor Plc. Coca-Cola Hellenic Bottling Co. and Nidan held a 35 percent share. Coca-Cola purchased a controlling stake in Nidan this year.
Wimm-Bill-Dann stock rose 1,333.91 rubles, or 58 percent, to 3,634.42 rubles in Moscow. PepsiCo fell 43 cents to $65.20 at 4 p.m. in trading on the New York Stock Exchange.
The purchase of the entire company should close by the end of the second quarter, Chief Financial Officer Hugh Johnston said during a call with reporters. Wimm-Bill-Dann will give PepsiCo about half the Russian juice market, he said. Wimm-Bill-Dann also operates a large and established dairy distributor, allowing PepsiCo to expand into milk-and yogurt-based snacks and drinks.
PepsiCo’s strategy includes making commodity items like milk more attractive to higher-income consumers through packaging, safety and product innovation, Mehmood Khan, PepsiCo’s chief research and development officer, said on a conference call. In emerging countries, that might include offering standard milk in enclosed, bacteria-free packages to customers used to unsanitary open containers. In developing countries, PepsiCo will create dairy-based drinks with more convenient packaging or added nutrients, he said.
PepsiCo dates its history in Russia to former Soviet leader Nikita Khrushchev’s first taste of Pepsi; the beverage was made available to the Soviet public soon after. By contrast, Coca-Cola’s drinks weren’t widely available there until 1989 with the opening of the first McDonald’s restaurant in Moscow.
PepsiCo opened its first Russian production plant in 1974 and has invested $3 billion there in the past decade. It’s stepping up expansion in a market where growth is forecast to outpace the U.S.
The Russian economy is forecast to grow 3.8 percent this year, its government estimates. The U.S. will expand 2.7 percent in 2010, according to Nov. 18 estimates from the OECD. Russia’s dairy market will expand at a “low-double-digit” rate for at least the next three years, the companies forecast.
Outside North America
The acquisition values all of Wimm-Bill-Dann at $5.4 billion. Wimm-Bill-Dann, Russia’s largest dairy company, had sales of about $2.4 billion in the 12 months ended in June. PepsiCo generates about 52 percent of its sales from the U.S. Coca-Cola gets about 25 percent of sales in North America.
Danone SA in October completed the sale of an 18.4 percent stake in the Russian company for $470 million. The French yogurt maker divested the holding to meet antitrust requirements on its merger with Unimilk, another Russian dairy company. That sale price valued all of Wimm-Bill-Dann at about $2.6 billion, according to Bloomberg calculations.
Andrey Goltsblat, a managing partner at Moscow law firm Goltsblat, which focuses on mergers and acquisitions, said PepsiCo’s move for the company was spurred by Danone’s announcement of a merger with Russia’s dairy producer Unimilk in June this year.
“Danone forced PepsiCo’s hand,” said Goltsblat by phone.
PepsiCo expects the deal to add 8 cents to per-share earnings starting in 2012, Johnston said during a conference call. The company will use cash from international operations to finance 75 percent of the transaction and use commercial paper loans for the balance, Johnston said. Those loans will be repaid quickly, he added.
Wimm-Bill-Dann’s foreign-sounding name was chosen by its founders 18 years ago because consumers didn’t trust local products at the time, according to its website.
Centerview Partners and Morgan Stanley served as financial advisers for PepsiCo, and Davis Polk & Wardwell LLP and Linklaters CIS provided legal counsel. J.P. Morgan provided financial advice for Wimm-Bill-Dann, and Latham & Watkins LLP acted as legal adviser.