Is Pepsico wise to buy Wimm-Bill-Dann in Russia ?
- February 14, 2011
||buyer and seller announcements, December 2010
||Wimm-Bill-Dann Foods OJSC (Russia), domestic no.1 in dairy and baby food, no.2 in juice
||Pepsico Inc. (USA), multinational food group
||founders and public shareholders of WBD
||to become the no.1 food group in Russia, strategic shift to nutrition
||Pepsico to first acquire 66% then later the remainder through public offering
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 ?
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.
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.
The 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 ?