Pepsi Goes Russki: How Will Deal Affect Earnings?

PepsiCo (PEP) and Pepsi Bottling Group (PBG) recently announced : completion of a 75.53% stake in Russia's leading branded juice company JSC Lebedyansky (RTS: LEKZ), excluding the company's baby food and mineral water business, for US$ 1.4 billion. The original deal had been announced on March 20, 2008. Additional terms of the agreement were not disclosed.

With only four months left in Calendar 2008 PepsiCo and PBG indicated the transaction will not materially affect its previously provided guidance for 2008. Well what about 2009- is it not that far away? The Russian market is growing double digits in certain categories.

On the other hand the Russian market has proven treacherous for oil companies. It seems that the Russian power elite let them fix up the oil industry and is then confiscating it. Just look at BP (BP). So the political risk is that if Pepsi is successful in substantially enhancing the value of its Russian enterprise, who is to say someone in the Russian power elite will not reach out and carve off a few juicy pieces for themselves?

PepsiCo operates as a consumer products company with an implicit risk premium driven by the desire to quench thirst with sugared water. Now you have to factor in political risk. If we worry about the cold war being rekindled with Russian operations in Georgia, you cannot accept Pepsi’s foray into Russia as just another day in the office.

Disclosure: None

Comments

[selene:]

Pepsi is one of the longest-established-in... Western companies. During the 1970's they had an agreement under which Pepsi was distributed in Russia and had exclusive rights to import and distribute Stolichnaya in the U.S. It is hardly just this week "going Ruskie" as you so charmingly put it.

2008 Sep 02 02:12 PM

[baycommutez:]

Agree selene, the post author ignores the long and successful history Pepsi has had in this country going back to former CEO Kendall, who was an ally of Nixon during the detente era (Coke, being from that other Georgia, was affiliated with Carter and the Democrats). Russia is unlikely to screw this relationship up.

2008 Sep 02 09:29 PM

[notsosmart:]

you dont know & cant tell what a russia or a china can do at anytime.they really dont care about world opinion.of course our gov. doesnt care much either.

2008 Sep 03 02:22 PM