Glenboden M & A Originations

What does Wimm-Bill-Dann acquisition say about Pepsico ?

Priority Rating priority rating 5
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Origination Status buyer and seller announcements, December 2010
Asset Wimm-Bill-Dann Foods OJSC (Russia), domestic no.1 in dairy and baby food, no.2 in juice
Buyer Pepsico Inc. (USA), multinational food group
Seller founders and public shareholders of WBD
Buyer Rationale to become the no.1 food group in Russia, strategic shift to nutrition
Seller Rationale attractive valuation
NBs Pepsico to first acquire 66% then later the remainder through public offering
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Buying Wimm-Bill-Dann allows Pepsico to become the largest food player in Russia; it also means the group's entered the dairy sector, at a time when other food giants are avoiding it. Plus the valuation's high for a target mostly at the commodity end of consumer foods.

Low -margin white dairy weighting ...70% of WBD's sales are in dairy products (see chart). Within that a large proportion is regular bottled milk and other white products (kefir, curds). The group's investor presentation starts with powdered and raw milk price graphs.

Why would Pepsico acquire such a business; especially when other multinationals like Kraft, Nestle or even Danone, are quietly disinvesting from dairy or certainly the white end of it ?

Leaving aside strategic issues with animal products, the financials are unappealing. WBD reports a gross margin of only 25% from its dairy business in Q2 2010; Pepsico might normally expect that at the EBITDA level.

... FJND, baby food at commodity end ...WBD's fruit juices, nectars and drinks (FJND) and baby food divisions have a higher gross margin, at around 45%, but again they're weighted in the commodity end of those categories.

Most of the FJND is in ambient from-concentrate bricks, and the baby food is 50% dairy -based but without infant milk formulas.

Given the above, we look at Pepsico's strategic rationale for the deal, and why they were prepared to pay so much for it.

... 'must have' in FJND consolidation ...Clearly a driver was that WBD's FJND business had become a 'must-have' for Pepsico. Having acquired Nidan, Coca-Cola had leafrogged Pepsico into no.1 position with over 30% market share.

WBD allows Pepsico to regain market leadership, with over 50% share. The Russian FJND market has been consolidated at staggering speed.

... strategic shift to nutrition ...On the strategic and global level, WBD brings Pepsico closer to its target of building a US$ 30 bln 'functional and nutritious' food business by 2020.

Pepsico is nobly transforming itself from a purveyor of salty extruded snacks and CSDs, having acquired Quaker Oats and built Tropicana in FJND.

In Russia, Lebedyansky and now WBD have added dairy and baby food to Pepsico's global portfolio.

... margins challenge in futureThe problem is that fruit juices, cooked cereals, white dairy products and wet baby food are all categories with inherently high materials' costs.

The big question is whether the money -managers that own Pepsico will be happy to see the >20% EBITDA margin, delivered consistently by Pepsico, be significantly reduced because of this switch to 'real' food.

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Size (€ mln) 4.000
Sector dairy products
Asset Quality Russia no.1 branded
Seller large plc
Buyer large plc
P/S 2,1
P/Ebitda 16,2
Type enterprise value
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