Pepsi Takes a Giant Step in Russia by Acquiring WBD Stake

 |  Includes: DANOY, KO, NSRGY, PEP, WBD
by: Alex Morris

Russia is a key market for consumer products companies, and the actions of many over the past two years have looked to solidify infrastructure and product lines to position for profitable growth over the coming decades.

All the big names are in the picture, and have their checkbooks in hand. PepsiCo (NYSE:PEP) announced in 2009 that it would invest $1 billion in Russia over the next three years, followed by Coca-Cola (NYSE:KO) announcing a $1 billion investment in beverage production over the next five years. There is clearly vision behind these substantial investments; as noted by Zoran Vucinic, the president of Coca-Cola’s Russia, Ukraine, and Belarus Business Unit, the company believes that Russia will become one of its top five global markets (currently it's #12) by as early as 2014, and expects to double the volume of its business in Russia by 2020.

The trend towards multinational development throughout Russia is present in other beverage businesses as well. At the end of 2009, Wimm-Bill-Dann Foods (NYSE:WBD) commanded 28.2% of the dairy market, followed by Unimilk (17.1%) and Groupe Danone SA (OTCQX:DANOY) (14.4%), the largest foreign-owned company by market share. That changed this year, when Danone and Unimilk announced a merger in June, creating the largest dairy company in Russia, with Danone holding 57.5% control and the option to increase its holding to 100% by 2022.

As noted by analyst Jean-Philippe Bertschy of Bank Vontobel AG in Zurich, “Danone has been eyeing the eastern European market for quite some time, and with this move, Danone now becomes the key player in that market.” Unfortunately for a company like Wimm-Bill-Dann, trailing the market leader (who happens to have near-unlimited resources, from WBD's perspective) is not a great position to be competing from.

But today’s news changed all of that in a heartbeat, as PepsiCo has announced its purchase of a majority stake (66%) in WBD for $3.8 billion, making it the #1 food and beverage company in Russia. As noted in the Wall Street Journal article outlining the agreement, PepsiCo said it will offer to buy the remaining stake in another bid following the initial offer's completion.

At first glance, this acquisition seems like a good fit for PepsiCo, but is driving growth in some different categories for PEP. One might be surprised to learn that between today’s acquisition of WBD and the Lebedyansky acquisition in 2007, PepsiCo now holds roughly 47.5% of the Russian baby-food market, compared to 11.5% and 6.2% for its two closest competitors (Unimilk and Nestle (OTCPK:NSRGY), respectively). In strengthening normal operations, the company's combined share provides PEP with more than half of the Russian juice market. This is the next move in its chess match with Coca-Cola, which purchased Russian juice producer Nidan in September.

The one piece of the acquisition that stands out in my mind is the dairy business. As noted by PepsiCo CEO Indra Nooyi, “Dairy has a huge, untapped potential to bridge snacks and beverages. We see the emerging opportunity to 'snackify' beverages and 'drinkify' snacks as the next frontier in food and beverage convenience."

I’m not too sure what that is supposed to mean, but we will likely hear management talk about it at upcoming calls/analyst events. Still, I am excited to see what this management team can do based upon past success. Looking forward, the Russian market is looking to be a focal point over the coming years for global CPG companies.

Disclosure: Long PEP.