In order to revamp its operations in the fast growing market of China, PepsiCo Inc (PEP) recently announced that it has received all necessary regulatory and shareholder approval to complete its strategic alliance with leading Chinese food and beverage maker, Tingyi Holding Corp. According to the terms of the agreement, which was entered into by both the parties in early November last year, Tingyi’s beverage subsidiary (Tingyi-Asahi Beverages Holding) will be appointed as PepsiCo’s franchise bottler in China.
PepsiCo will sell its 24 Chinese bottling operations to Tingyi by transferring its indirect equity interest in the bottlers to the latter. In return, PepsiCo will be receiving a 5% equity interest in Tingyi-Asahi Beverages (TAB). In due course of time, PepsiCo has plans to increase its interest to 20% by 2015, when China is estimated to become the world’s largest liquid refreshment beverage market.
Tingyi will join PepsiCo’s other bottlers to manufacture, sell, and distribute PepsiCo’s soda and Gatorade brands. However, PepsiCo will still retain branding and marketing responsibilities for those products. Once Tingyi gains the license from PepsiCo, the Chinese food and beverage maker will begin co-branding its juice products under the Tropicana brand name.
The deal lets Tingyi, which owns the Master Kong brand of instant noodles, drinks and snacks, expand its beverage offerings without hurting its balance sheet. Further, Tingyi's purchase might help PepsiCo to revamp its Chinese business by capitalizing on Tingyi's extensive distribution network in China.
Our Recommendation
We currently have a Neutral recommendation on PepsiCo on a long-term basis. However, the stock carries a Zacks #4 Rank (short-term ‘Sell’ rating).
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