Glenboden M & A Originations

Is Pepsico wise to buy Wimm-Bill-Dann in Russia ?

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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Milk is an inherently expensive thing to produce. So why is Pepsico, with its DNA of high profitability, buying Wimm-Bill-Dann, Russia's largest dairy group ?

Seductive story ...By acquiring WBD, Pepsico becomes the largest FMCG company in Russia and the CIS - twice the size of the no.2; with US$ 5 bln in combined revenues, and six of the 20 top food & beverage brands.

Dairy is underrated, according to Pepsico - bone health for aging populations in developed markets; accelerating trend to branded and packaged dairy in developing markets.

Plus the emerging opportunity to 'snackify' beverages and 'drinkify' snacks, as the next frontier in food and beverage convenience, with dairy providing that bridge.

... some strategic downsides ...WBD claims to be the no.1 dairy player in Russia, with nearly 30% market share. 70% of its sales are of dairy products (see chart).

Within that, a large proportion is regular bottled milk and other white products (kefir, curds). These are low-margin products, which other big food groups, like Nestle and Danone, are avoiding and exiting.

Plus the related issue, that proximity to raw milk supply is important in the dairy industry. Hence WBD has nearly 40 production facilities across Russia and CIS; Pepsico will be taking those on board.

... jubilant financialsThe valuation in this deal, at a 30% premium to the pre-deal trading price of the ADRs of WBD, is quite toppish from a multiples perspective (see valuation).

That could be justified by growth. WBD's nearly doubled its top line since 2005, and projects another doubling by 2015, in US$ terms. But Russian inflation has outpaced ruble devaluation in recent years, flattering US$ growth rates.

Coming back to the profitability story, WBD's EBITDA margin is 13% in 2010E; low by Pepsico standards. Plus it cites 'cost leadership' as a vision for 2015. How compatible is that ?

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THIS LEAD'S VALUATION
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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