To Russia with love. Aside from news that a football tournament will be played there in 2018, PepsiCo announced on Thursday that it plans to stump up $5.4bn for Russian dairy and juicemaker Wimm-Bill-Dann. Pepsi has been attracted by the opportunity to add the “nutrition” business (mostly oats, juice and sports drinks) of Wimm-Bill-Dann. Named to offer a touch of western glamour to post-Soviet consumers, Wimm-Bill-Dann will make Pepsi the largest food and beverage manufacturer in the country. It is a head start on the target to triple nutrition sales to $30bn by 2020.
Investors might ask at what cost this aim is to be achieved. Pepsi is buying a two-thirds stake now and will tender for the remainder once regulators approve – not guaranteed as the combined entity will control half the Russian fruit juice market. A valuation of $5.4bn for WBD, including net debt, is double the valuation at which competitor Danone sold its 18 per cent stake for in August, as it shifted to an alliance with OAO Unimilk. Admittedly that number was set by a formula agreed years in advance.
Still a valuation approaching 16 times this year’s forecast for earnings before interest, tax, depreciation and amortisation is full for an emerging market food business. Growth has typically been fast, with the Russian dairy market expanding by 22 per cent annually since 2006, according to Pepsi. Dairy consumption per head is also half that of developed markets, indicating plenty of room for expansion. But Russian food manufacturing is cyclical, with sales falling in 2009 due to the effects of recession. Operating margins for WBD, meanwhile, have been in the single-digits for the past decade.
