Pepsi - The Pause That Refreshes

PepsiCo Juiced Up for Russia
From UBS Investment Research

PEPSICO AND PEPSI BOTTLING GROUP are set to acquire the juice business of Lebedyansky, Russia's leading juice manufacturer for $1.4 billion and approximately $500 million of debt, which implies 17 times 2007 estimated enterprise value to earnings before interest, taxes, depreciation and amortization.
We expect the deal to close after the end of the third quarter of 2008.
Following Coca-Cola's joint venture with Coca-Cola Hellenic Bottling for Multon [a Russian fruit juice company] in 2005, it was expected that PepsiCo was also searching for a strong juice company that would provide it with access to the fast-growing Russian market.
Speculation that Lebedyansky would be PepsiCo's target has been ongoing for almost two years, and on March 20, PepsiCo agreed to buy a majority stake in Lebedyansky along with its largest bottler, Pepsi Bottling Group. PepsiCo and Pepsi Bottling Group will form a joint venture for the Lebedyansky business, with PepsiCo taking a 75% stake and Pepsi Bottling Group taking a 25% stake compared to their current partnership in Russia in which PepsiCo has a 60% stake and Pepsi Bottling Group has a 40% stake.
We believe the deal will be financed with debt, be neutral on 2008 earnings and slightly accretive in 2009 for PepsiCo and Pepsi Bottling Group. We rate PepsiCo at Buy and believe they can continue to deliver double-digit earnings growth, led by international where we believe the company is hitting reinvestment tipping points. We rate Pepsi Bottling Group at Buy as we are positive on higher penny-profit contribution from new products, cost savings from 2007 restructuring and easier cold drink comparable sales.
Lebedyansky is the leading Russia juice player with about 32% value market share. Company has strong brands: Ya (premium), Tonus (medium) and Fruit Garden (economy). Lebedyansky's distribution is considered to be one of the best in the country.
We are optimistic on the potential of the Russian juice market, as sales totaled more than $3 billion in 2007 growing double-digits, and per-cap consumption continues to increase. We expect double-digit sales growth to continue through 2010 as income levels continue to rise, allowing more consumers to purchase juice.
We expect the Russian juice market to show a volume compound annual growth rate from 2006 to 2010 of 9.6%. Why do we expect Russians to drink more juices? Growing incomes change consumption habits, and we expect them to become more diversified.
We forecast that per-capita juice consumption will double from 17 liters in 2006 to over 34 liters by 2014, reaching current European levels. Per-capita consumption in Moscow already exceeds 34 liters. Juices are winning an increased share, replacing carbonated drinks and tea.
We expect Lebedyansky will be a key beneficiary as juice sales continue to grow at 15%-plus through 2010. We also believe Lebedyansky margins can improve as PepsiCo's global procurement and manufacturing capabilities should drive cost of goods sold lower.
Additionally, Lebedyansky has been supporting growth in Siberia with production from two plants which are located in Moscow and St. Petersburg. Their new plant in Siberia should lower transportation costs significantly and thus lead to margin improvement.