Sodastream International Ltd (SODA) an M&A Target?

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 International Ltd (NASDAQ:SODA) 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 International Ltd (NASDAQ:SODA)’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 International Ltd (NASDAQ:SODA) 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 International Ltd (NASDAQ:SODA)’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.

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.

The article Is This Israel-Based Company an M&A Target? originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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