As a part of its strategy to spread across China, the U.S. based leading global food and drinks company, Pepsico Inc. (PEP) has decided to team up with Tianjin-based Taiwanese beverage company, Tingyi Holding, and sold its Chinese bottling operations to the latter.
As part of the deal, Pepsi will transfer its indirect equity interests in the bottler to Tingyi. Tingyi Holding's affiliate company, Tingyi-Asahi Beverages (TAB) Holding, will be appointed as Pepsi's franchise bottler in China.
Pepsi's wholly-owned subsidiary, Far East Bottlers, will hold a 5% indirect interest in Tingyi-Asahi Beverages. The beverage giant has decided to keep a 5% indirect equity interest in the Tingyi subsidiary. It has plans to increase its interest to 20% by 2015.
Tingyi will join Pepsi’s global partners to manufacture, sell, and distribute Pepsi’s soda and Gatorade brands. However, PepsiCo will retain branding and marketing responsibilities for those products.
Tingyi will begin co-branding its juice products under the Tropicana brand name after it gains the license from PepsiCo. The transaction is subject to regulatory approval in China.
Tingyi, which owns the Master Kong brand of instant noodles, drinks and snacks, has a market capitalization of $15 billion, after roughly a 20-fold increase in its share price in the past 10 years, which is boosted by rising consumer demand in China. The deal lets the company expand its beverage offerings without hurting its balance sheet.
ChinaBottlers Ltd, the company that runs Pepsi's 24 bottling factories in China, reported a loss of $220 million in the past two years. Losses were also reported from Pepsi's Chinese shareholder companies.
Analysts feel that Tingyi's purchase might help Pepsi lessen its burden and also allow it to reverse its loss-making situation by capitalizing on Tingyi's extensive distribution network in China.
Pepsi Labors to Capture Chinese Market
Pepsi is trying hard to capture the fast growing market in the Land of Dragons. In September 2011, the retail giant announced that it will invest 144 million yuan ($22.52 million) for increasing its ownership in its Chinese Bottling Operation–Shenzhen Pepsi, from existing 75% to 90%.
Moreover, PepsiCo is trying to claim a bigger slice of profits and directly control its business in the Chinese market. Beijing Pepsi Cola Beverage, established in 1988 with a registered capital of $14.12 million, is a 50-50 joint venture between Pepsi China and Beijing Yiqing.
In 2010, PepsiCo announced plans to invest an additional $2.5 billion in China over the next three years, in addition to the $1 billion investment the company had announced in 2008.
PepsiCo plans to open 10 to 12 new plants in China to manufacture soft drinks, non-carbonated beverages and snacks. The company currently operates 27 beverage and food plants in the country, most of which are joint ventures.
Pepsi versus Coca Cola
However, the company lags behind its close competitor Coca Cola Company (KO) with respect to investments in China. The beverage giant announced that it will pump $4 billion into the country between 2012 and 2014. Moreover, Coke currently controls 55% of the carbonated soft drinks market in China, with Pepsi lurking at 32%.
Our Take
For Pepsi, its decision to team up with Tingyi came after its bottling business in China suffered great losses from inflating raw material costs. The deal will help Pepsico broaden its distribution, and will allow it to unload those loss-making operations and give it a stake in a company poised for faster growth than Pepsi alone.
Currently, we prefer to be Neutral on the stock. Furthermore, Pepsi holds a Zacks #3 Rank, which translates into a short-term Hold rating.
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment