Glenboden M & A Originations

Will Pepsico make breakthrough into Russian juice market by acquiring Lebedyansky ?

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Origination Status company acquisition press reports, August 2007;
Asset Lebedyansky JSC (Russia), domestic market leader in fruit juice and some baby foods;
Buyer Pepsico Inc (USA), multinational food group;
Seller shareholders of Lebedyansky;
Buyer Rationale expansion of portfolio beyond CSDs in Europe, growth in major developing markets;
Seller Rationale attractive valuation, good timing;
NBs Lebedyansky has 33% share of fruit juice & nectar, 44% of baby juice and 32% of baby fruit and puree markets in Russia.
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The timing couldn’t be better for Lebedyansky’s owners and public shareholders to get a full price for that business. Firstly, Pepsico’s arch-rival Coca-Cola took a 25% stake in the Russian juice market by acquiring Multon in 2005; the two companies are competing over acquisitions and market shares in European juice intensively right now. Secondly, Pepsico is currently ‘on a roll’ when it comes to buying juice companies specifically in eastern Europe, having bought Ukraine’s Sandora two months earlier. We think it’s likely that a deal will be announced shortly, therefore, if financial rationale prevails.

In terms of valuation benchmarks, unfortunately the financials of the privately –held Sandora are unavailable, and the other soft drinks deals covered so far by Glenboden are not comparable.

We can say however that Lebedyansky’s current market capitalisation provides us with an enterprise value P/S roughly equal to the x3,0 paid by Wrigley for A.Korkunov.

Although Korkunov is a confectionery company, and much smaller, we think mutatis mutandis they are comparable by virtue of being no.1 - 2 in attractive fast growing markets in the same country.

Sobering to think, ‘though, that Coke paid less that x2 P/S for Multon, but then valuations were generally lower in 2005.

If however Pepsico pays e.g. the classic 30% premium to the traded share price, then the P/S pushes against 4,0 and the P /EBITDA is in the high teens. This wouldn’t be surprising, given the timing issues mentioned earlier, and given Lebedansky’s staggering growth rate – its CAGR in 2003-6 was 38%, significantly higher than the overall market growth rate, so its share has been growing also.

The one thing that is worrying is fruit juice acquisitions in general, and Lebedyansky is no exception, is the tendency for target companies to have a number of ‘sub-brands’, for different market segments, rather than just one monolithic brand (like Pepsi for instance, or Korkunov while we’re at it).

This puts a question mark on brand equity, which should temper the valuation numbers. It also has a remarkably high EBITDA margin, for the juice business (nearly 20%), which may be unsustainable.

Finally, although baby food products constitute only 12% of Lebedyansky’s sales, the company has very significant market shares in the two segments of baby juices and baby fruit and vegetable purees. This makes its baby food business a prime divestment candidate, if Pepsico does buy Lebedyansky, especially given that the group hasn’t expressed any strategic interest in this ‘nutritional’ market so far.

We know from the Gerber and the Numico deals, that respectively both Nestle and Danone are ‘on a roll’ when it comes to baby food acquisitions, and Russia is a big enough market for regional bolt-ons for them. But that’s just a contingent opportunity, from Pepsico’s perspective, as so far the ‘skin is still on the Lebedyansky bear’.

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Size (€ mln) 1.500
Sector fruit juice
Asset Quality Russia leader branded
Seller mid-cap plc
Buyer large plc
P/S 2,9
P/Ebitda 14,6
Type total consideration
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