Is This Israel-Based Company an M&A Target?

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

SodaStream (NASDAQ: SODA) shares have risen 51% in the last three months. The company, that enables customers to produce their own sparkling beverage at home, has been at the center of acquisition rumors related to PepsiCo (NYSE: PEP) and Coca-Cola (NYSE: KO) of late. Although PepsiCo denied those deal rumors, shares of the Israel-based company have surged impressively.

Ideal acquisition target

SodaStream produces carbonation devices, canisters, CO2 cylinders, and flavored syrups which are sold at big retailers such as Wal-Mart or Macy’s as well as smaller stores. The company posted $436.3 million in revenue for 2012, achieving a 51% growth compared to 2011 with an outstanding 60% increase in net income for the same period. The company is also developing strategic partnerships with Kraft, Campbell’s, Breville, and Ocean Spray and mounting a geographical expansion towards emerging markets that could be very beneficial to counterbalance its exposure to mature markets.

All of these reasons make the company a very attractive target for Coca-Cola and PepsiCo. Why? Because the company has a renowned brand and product awareness, it has increased active users, it has developed a good retail network (present in 45 countries and 60,000 stores) and advertising campaign, it has thrived with new products and the most important aspect of all: most of its financials are really solid, exhibiting an astonishing 2009-2012 CAGR (compounded annual growth rate) of 47% in revenue, 53% in EBITDA, and 71% in net income.

And another key characteristic is that SodaStream is still growing in mature markets, so its growth prospects seem very promising.

How could SodaStream benefit PepsiCo?

PepsiCo has to find other sources of income to boost its profits. The company posted a flat net revenue for the first quarter of 2013 compared to the same quarter in 2012, totaling $12.5 billion. Moreover, its operating profit also decreased 4% in the same period of comparison which could start some alarm signals. The acquisition of SodaStream could renew the choked earnings on the beverages segment which represents more than half of PepsiCo’s profit and it has been sluggish regarding growth prospects.

SodaStream has a lot of opportunities to expand in the Americas region, where its household penetration does not exceed 1%. In Europe, where the company has consolidated the brand and products, it reaches an approximate 20% in household penetration in some of the countries. This could be a great opportunity for PepsiCo to revitalize its product offerings and with its large scale, enter new markets that have excellent growth conditions.

Coca-Cola & SodaStream

Coca-Cola is in a similar situation as PepsiCo. For the first quarter of 2013, the company posted a 4% worldwide volume growth but had a decline in revenue of 2% in Europe, 1% in North America, 4% in the Pacific, and 3% in bottling investments compared to the prior year quarter. Better than acquiring SodaStream that could result in competition with Coca-Cola’s main products, the companies might be working on a partnership.

This strategic alliance could mean a new and revolutionary offering for Coca-Cola as it does not have a similar product in its portfolio. It could be a great complement for hedging against sales decline in the traditional soft drinks markets and could generate positive synergies with the company’s sparkling beverage products that grew 3% in volume compared to the same quarter last year. Moreover, a partnership guarantees the giant beverage company that SodaStream will not fully control  that business line.

Fizzy hazards

For Coca-Cola and PepsiCo, the bid for this company will have to wait a while. Currently, as shares have surged almost 50% in the last three months, that would make the acquisition a bit expensive for both of them. It seems the market has been overpricing the stock lately.

Also, there are concerns regarding some aspects of SodaStream’s financial position. The company is spending hefty amounts on advertising and marketing that hurt sales margins even as it is increasing sales substantially each year. This could be viewed as a bet that is costly now but could increase sales later, but certainly an issue the company must resolve. Another problem is that the company is spending much of its profit on capital expenditure and working capital. This might be an indicator of SodaStream’s strong growth, but is still a burden it will have to address.

Other risks the company is exposed to are linked to loyalty. This is an important factor in the beverage industry as U.S. consumers are not so eager to change from traditional soda flavors such as Coca-Cola or PepsiCo to similar ones from a barely known manufacturer. However, SodaStream has the advantage of a sugar-free offering that can drive some health concerned consumers towards its products.

The important driver for SodaStream is selling canisters and flavorings because the main business is not focused on selling soda devices but centered on convenience and price. If the company can maintain its price near $0.25 a can as advertised and continues to develop new products and offerings with strong partnerships, it could become a problem for Coca-Cola and PepsiCo in the future.

Moreover, if we consider that emerging markets are unexplored and will add more growth potential to the company, I think that Coca-Cola or PepsiCo will try to acquire or probably develop a partnership with SodaStream but the main question is: when?

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.


Vanina Egea 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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