As Coke and Pepsi Circle Sodastream, What's at Stake for Regular Investors?

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recent reports that Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP) were separately considering bids to purchase upstart beverage manufacturer SodaStream (NASDAQ: SODA) have thrown the normally staid soft-drink industry into a tizzy. While the rumors swirling around this situation have yet to be independently verified, it is not difficult to see why Coke and Pepsi would want to purchase SodaStream. Indeed, the company's potentially disruptive technology could lead to its acquisition at a significant premium to its current price.

SodaStream investors clearly hope that these rumors have some substance behind them. Investors responded to news that Pepsi was considering a $95-per-share offer by driving up SodaStream's shares by more than 30 percent on an intra-day basis. Pepsi's swift denial of the claims sent shares plummeting back to their pre-rumor levels. While some investors might interpret such volatility as a warning sign that SodaStream's investment thesis relies on a "white knight" acquisition, others may see it as a classic arbitrage opportunity or short-term trading play.

Coca-Cola, Pepsi and SodaStream at a Glance

It should go without saying that these three companies are at very different stages of development. Whereas Atlanta-based Coca-Cola and New York-based Pepsi are mature companies that produce a dizzying array of food and drink products for human consumption, Israel-based SodaStream is a niche business with a signature product that has the potential to disrupt a seemingly stable industry. A quick financial comparison of the three firms is certainly in order.

SodaStream is much smaller than Coke and Pepsi. Its current market capitalization of about $1.6 billion fluctuates wildly, but it always remains far below Coke's $183 billion valuation and Pepsi's $128 billion market cap. Likewise, SodaStream's revenues and income would be little more than a rounding error on either of its rivals' books. In 2012, the company earned around $46 million on revenues of $466 million. While its 10 percent profit margin is nothing to sneeze at, it is a far cry from Coke's final haul of $8.7 billion on gross revenues of $48 billion. It is also paltry relative to Pepsi's take of $6.1 billion on revenues of over $65 billion.

SodaStream is well-capitalized, but its levered free cash flow figure of minus $25 million could soon become troublesome. For the time being, it has a small debt load of just over $8 million and a cash reserve of about $50 million. Meanwhile, Coke has a debt pile of $35.1 billion, a cash hoard of over $18 billion, and a levered free cash flow figure that exceeds $5 billion by a comfortable margin. Pepsi has respective figures of $29.4 billion, $7 billion and $6.9 billion.

Competing Offers...

During the first week of June, an Israeli newspaper cited an unnamed official who claimed that Pepsi was about to make a $2 billion offer for SodaStream at up to $95 per share. Meanwhile, another publication alluded to the possibility of a similar offer from Coke. However, the Coke story was a bit more vague and lacked specific numbers. Crucially, both reports indicated that each company was waiting for the other to make a move before deciding whether to continue.

...Or Baseless Speculation?

For its part, Pepsi denied the rumors almost immediately. This quickly crushed SodaStream's hours-long rally and sent the stock back down to earth. Nevertheless, recent price action suggests that investors have not completely discounted the rumors. SodaStream currently trades about $7 higher than it did on the day before the Pepsi rumor broke, and it has exhibited favorable technical behavior that could create short-term opportunities for savvy traders.

Potential Synergies and Complications

SodaStream has always been a controversial stock. While some analysts argue that the company sells a "fad" product that lacks the power to disrupt the soft-drink market on a sustained basis, other argue that SodaStream's home-carbonation system is the wave of the future. Unfortunately, each side clings strongly to its opinions, and there is little in the way of constructive debate on the subject.

In theory, a merger between one of the "Big Soda" companies and SodaStream would create a powerful new market for "home-brewed" soft drinks. By selling syrups directly to consumers with SodaStream's home-carbonation devices, Coke or Pepsi might plausibly create a line of "craft sodas" that cater to high-end consumers or health-conscious parents who have stopped buying soda products for their kids.

At the same time, such a move might run the risk of cannibalizing revenues from these companies' extremely lucrative lines of sugary and diet-labeled soft drinks. As such, it would require a careful risk-reward calculation. Rank-and-file investors would not be privy to such a calculation, and it is not certain whether the analysis would be accurate in the first place. It may be better to take Pepsi's denials at face value.

Possible Plays

This does not mean that investors should discount SodaStream's attractiveness as a buyout target. In fact, the company's technology could be attractive to a wide range of consumer-product firms as well as the bottling subsidiaries with which Pepsi and Coke maintain close relationships. Investors who believe that SodaStream is not just a fad would do well to look at the stock at these levels. Regardless of the recent buyout rumors, this company looks to reward short-term traders with its volatility and long-term traders with its potential for eye-popping growth.

SodaStream's carbonation technology sounds simple, but this razor-and-blade company offers an intriguing opportunity for growth that could very well disrupt the soda industry. The Motley Fool's premium report on SodaStream explains the opportunities as well as the risks in the company. The report comes with a year’s worth of updates, so just click here to get started.


Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, PepsiCo, and SodaStream. The Motley Fool owns shares of PepsiCo and SodaStream. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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