Glenboden M & A Originations

Pepsico's bet on V Water may be a deal that's too early -stage

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Origination Status buyer announcement of company acquisition in April 2008
Asset V Water (UK), niche domestic flavoured water business
Buyer Pepsico Inc (USA), multinational food group
Seller two founders of V Water
Buyer Rationale expansion of portfolio beyond CSDs and into healthier concepts
Seller Rationale need for strong partner to get to next level
NBs V Water’s market segmentation strategy is based on ‘consumer moods’
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This little deal illustrates how audacious Pepsico’s acquisitions have become, in developed markets. The group’s $500 mln per annum warchest, for ‘tuck in’ purchases, seems to be burning a hole in its pocket. This is a speculative deal, but with a big and risky investment later on for Pepsico. That’s because of the major expense of educating the consumer to buy the V Water concept, to take the brand beyond its existing niche and into the mainstream.

This deal follows a pattern set by Pepsico’s acquisition of Izze Beverage in Q3 2006, and Coca-Cola’s purchase of Fuze Beverage in Q1 2007. In each case, the target company was set up by ‘two people in a basement’, and was barely a few years’ old, but had an all natural product and an interesting marketing story. It seems like a good idea for a big corporate to nurture such businesses almost from birth, but in reality they risk being smothered to death. There are two routes to this fate. Either the brand is just too small to be focused on by the buyer’s huge sales machine, or a major marketing spend, behind the brand, fails to retain the youthful essence of the brand.

V Water was established in 2005 by two people, and is distributed mostly in high -end stores. The fact that it’s stocked by Harvey Nicholls, in London’s exclusive Knightsbridge area, underlines just how niche and ultra -premium it must be. A business like that should really stay independent for many more years, climb the learning and growth curves, then be sold to a major once it’s proven that its sustainable, has mainstream appeal and is at the stage where it needs greater commercialization. Pepsico’s acquisition of Naked Drinks in Q4 2006, a company with a 20 year history and over $150 mln in sales, meets these criteria and is the type of deal that Pepsico should be doing.

V Water is 6 single –serving bottle SKUs, all -natural spring water fortified with vitamins, minerals and herbal extracts. The marketing angle is indeed very novel, with product taglines like ‘make my skin glow’ or ‘beat the Monday blues’. Is seems that Pepsico is making a bet that this type of positioning is where the future lies. It’s likely therefore to spend a lot of money trying to educate the consumer to buy according to their moods, and to trust that V Water brand will deliver to those moods. That’s a hugely ambitious target, and one that risks a spiral of investment.

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