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By Joanna Bromley

Looks like food deals are where it’s happening! There’s another food deal in the pipeline, but this time it’s a little more exotic than KKR’s (KKR) bid for Del Monte (DLM), discussed last week. What’s more, if you’re a fan of milk products, it may just be a bit more tasty.

This past Thursday, PepsiCo (PEP) announced that it will pay $3.8 billion, or $33 per American Depositary Receipt, to acquire Wimm-Bill-Dann (WBD), a Russian market leader in dairy, children’s food, and non-alcoholic drinks. As a result, PepsiCo will be Russia’s largest food and beverage company. This is PepsiCo’s largest international acquisition, as well as the largest American acquisition of a Russian company.

Why Wimm-Bill-Dann?

First, a little about Wimm-Bill-Dann. The company generates approximately 70 percent of its revenue from dairy products, and in recent years has experienced 22 percent annual sales growth. PepsiCo believes revenue growth will continue to be solid, eventually dropping to the low teens.

In a CNBC interview, the CFO of PepsiCo, Hugh Johnston, explained this unusual growth in revenue. It all has to do with “added-value” dairy products, he says.

Russia is a growth market for consumer products because of its burgeoning middle class. Soon these Russians will begin to appreciate the dairy products Americans have come to know and enjoy, such as drinkable yogurt and kefir products. This is all part of a push to “drinkify snacks” and “snackify drinks,” as Johnston and CEO Indra Nooyi claim.

Exactly How Will This Deal Work?

It’s a little complicated. First, Pepsi will buy 66 percent of Wimm-Bill-Dann for $3.8 billion, and will announce a tender offer for the remaining shares. The deal was structured in this way for a few reasons, the most interesting of which is that for Winn-Bill-Dann and other companies founded in the 1990s, share ownership structure is not entirely clear.

The shroud of secrecy surrounding Winn-Bill-Dann’s share ownership is intriguing: The company disclosed that its largest shareholder, billionaire Gavril A. Yushvaev, served nine years in a Soviet prison camp. In addition, there are all kinds of tax, currency, and “tangled relationship” issues, according to the New York Times’ Dealbook. The structure of this transaction will aid in sidestepping some of these problems.

How Has PepsiCo’s Stock Reacted?

Wimm-Bill-Dann’s stock price jumped 28 percent after the announcement, while PepsiCo’s dropped 0.7 percent, which is what we would typically expect, given that investors feel PepsiCo may have overpaid. The price is a 32 percent premium over Winn-Bill-Dann’s 30-day average price of its ADRs.

Click to enlarge:

The chart above is particularly interesting, because it shows how the stock has traded up in the past couple of years, but overall the purchase price looks like it’s simply a return to pre-crisis levels.

Yet in October, Danone (OTC:DANOY) sold its 18 percent stake in Wimm-Bill-Dann for $470 million, implying a total company value of $2.6 billion versus the PepsiCo deal’s $5.4 billion valuation.

Click to enlarge:

Sure, PepsiCo traded down for a bit, but now it does not seem much worse for the wear.

Emerging Markets Targets

According to the New York Times, in the race to capitalize on opportunities in emerging markets, PepsiCo sees Wimm-Bill-Dann as a means of expanding its annual revenue in its global nutritious foods division from $10 billion to $13 billion, and eventually to $30 billion by 2020.

In fact, PepsiCo already got a head start in 2008 when it bought a 76 percent stake in JSC Lebedyansky, another Russian juice maker. Now, PepsiCo’s global nutritious foods division accounts for approximately one sixth of its total annual revenue.

The elephant in the room is Russia. While this deal certainly is a vote of confidence in the country, Russia is trying to improve its appearance of transparency and dependability.

How is this going? According to Transparency International, not so well. Russia ranked 154 out of 178 on the 2010 Corruption Perceptions Index, which measures the perceived levels of public sector corruption in these 178 countries. On the bright side, Russia ranks above Venezuela, Iraq, Afghanistan, and number 178, Somalia. So it’s got that going for it.

This ranking is not surprising, given a series of shady practice in the corporate sector, such as Ikea’s recent issues with management bribery. However, Russia is no worse for the wear: M&A volume in Russia is the fastest growing of the BRICs, and represents 19 percent or $53 billion of the group’s total volume.

Ok, so it’s not all about Russia. PepsiCo also sees this acquisition as another way to gain a stronger foothold in central Asia.

On a lighter note, things are looking up for M&A activity in the overall emerging markets world. Acquisitions by American companies in emerging markets are up 94 percent since 2009, according to Thompson Reuters.

So, in conclusion, when you think of Pepsi, remember that it’s not all about drinking glasses full of sugar or cancer-causing sugar substitutes (that’s right, you lose either way). It’s also about Russians drinking yogurt, which is a win-win for Pepsi and for Russia.

Disclosure: No positions in the stocks mentioned.

Source: As Close a Look as Possible at the Pepsico / Wimm-Bill-Dann Deal