At the start of the year PepsiCo CEO and chair Ramon Laguarta outlined his vision – for the company to accelerate the rate of top-line growth for balanced, sustainable financial performance and long-term shareholder value.
Part of this involves fast growth of the global multinational convenience food and beverage company’s reach in developing markets. When asked by Deutsche Bank what that would look like in 2025, Laguarta said: “A company that plays in two huge large categories”.
“Think of us – we sell 1.5 billion servings a day, so we touch conceptually 1.5 billion people around the world every day, so our ambition is to become at least a two-touch [to] at least two billion people every day,” Laguarta told investors in a conference call.
On Friday, PepsiCo proposed a $1.7 billion (close to R24 billion) acquisition of Pioneer Foods – its second biggest acquisition outside of the US in a decade.
The announcement left the 100-year company’s stock trading more than 31.11% higher on Friday, with Pioneer’s share price closing at over R101 per share after opening at R77.60.
Deeper market penetration
“The acquisition is all about growth,” PepsiCo sub-Saharan Africa CEO Eugene Willemsen told Moneyweb after the announcement.
Willemsen says the move will expand PepsiCo’s footprint in South Africa as well as the sub-Saharan region and will allow the company – which already has a presence in SA through crisp brands such as Simba, Lay’s, Fritos and Doritos as well as soft drinks like Pepsi – to further penetrate the South African market through a combined portfolio with Pioneer.
Pioneer owns brands such as Bokomo, Ceres and Liqui-Fruit. It is also the producer of essential food brands such as White Star, Spekko and Sasko.
Pioneer CEO Tertius Carstens says the company is excited about the transaction, seeing it as a vote of confidence in Pioneer Foods and the brands it has built over the years. He says it also represents a much-needed endorsement of South Africa as an investment destination.
Staples not aligned with PepsiCo portfolio?
Independent analyst Anthony Clark says that while the combination of PepsiCo and Pioneer will make for a powerful entity in the country, it seems PepsiCo is paying a lot of money for juice and cereal.
This is because a significant amount of Pioneer’s revenue comes from essential products such as bread, rice, mielie meal and baking aids, which are not aligned to PepsiCo’s portfolio, which centres largely on snacks and beverages.
“I must question in due course if those assets will be sold off or perhaps, if they do invest in them, what that will mean to domestic competition that trades in those products,” says Clark.
Carstens and Willemsen both dismissed ideas about PepsiCo selling off the essential goods businesses, saying the entities are highly complementary.
Willemsen says Pioneer’s portfolio “allows PepsiCo to go much deeper” using the channels and outlets that the company has established.
In a South African context, essential goods remain a compelling offering and the route to market can be leveraged in various ways for those two specific businesses, says Carstens.
He points out that PepsiCo’s South African snacking business reaches more than 30 000 local and traditional customers, while Pioneer’s bread business reaches over 45 000 customers on a daily basis, saying this shows a bit of customer overlap.
Cheap assets or a good deal?
PepsiCo is offering Pioneer R110 a share, which is 56.5% higher than its 30-day average trading price of R70.31.
While some market watchers have said the price is cheap compared to Pioneer’s share price peak of R210 in 2015 (it has been beaten down by a tough operating environment), the company said in a Sens announcement that shareholders would be able to dispose of their shares “at a premium and with manageable risk”.
The boards of directors of both companies have unanimously approved the deal, with Pioneer saying that it is in the interests of the company and its shareholders that they be given an opportunity to consider the offer.
Carstens says Pioneer will be able to leverage off PepsiCo’s research and development strength as well its global expertise, not to mention its bottling and global distribution network.
“We have grown quite rapidly through acquisition – if you think about it, the Ceres, Liqui-Fruit, Moirs and Marmite to name a few of the brands and businesses we currently have, were assimilated through acquisition,” says Carstens. “This shows that we are not foreign to that trajectory of change and how to live within that environment.”
Shareholders will decide
The deal has already received the support of just under 53% of Pioneer’s ordinary shareholders – including its largest shareholder, Zeder Investments, which paid R99 a share for 28% of the company in 2014 and will, after five years, get R11 in profits per share.
Carstens says shareholders will have to decide if the offer is compelling enough. The transaction is subject to a Pioneer Foods shareholder vote, regulatory approvals and other customary conditions, and is expected to be concluded by the first quarterof 2020.
Clark says this is a generous premium for the company, which is at a low point in its earning cycle in an environment that is not conducive to investment performance, and thus a good incentive to take the “American’s 30 pieces of silver and run”.
“While in the short term investors will have money in their pockets, in the longer term we as a nation lose what has been a 100-year-old business which has substantial growth potential in the years to come, but now we will never know that,” says Clark.