As I mentioned before, Anheuser Busch Inbev SA (ADR) (NYSE:BUD) already is (though its subsidiary Sao Paulo based subsidiary AmBev) PepsiCo’s biggest bottler. Hence, the combination of these two companies would be a natural one. Besides, Anheuser Busch-InBev is an expert in slashing costs and streamlining operations, which is exactly what PepsiCo needs in the U.S.
– Scale in emerging markets particularly where both beverage companies have strong market share presence (Latin America, China,and Russia).
– Distribution synergies would be a big plus.
– Both companies have already a partnership where they jointly purchase goods and services (such as IT Hardware) in the United States. Besides, both have recently teamed up on joint promotions and retail marketing. A full merger could be a natural extension of the relationship that these two companies already have in place.
– Following what has been done in the beer industry, PepsiCo could move to a model where only distribution is outsourced. This means that, in the U.S., a lot of the manufacturing could be kept in-house and consolidated to much larger facilities.
Cons: Again, mainly break-up costs (estimated at $2.1 billion).
The bottom line
Assuming that PepsiCo “de-merges” and both the remaining separate entities (food and beverage) are acquired at average M&A multiples, PepsiCo’s shareholders could benefit hugely. I estimate that if the food business is bought at 14 times EV/EBITDA and the beverage business is bought at 14.5 times EV/EBITDA, taking off $2.1 billion in break-up costs from the total, PepsiCo shares should be valued at $97 (a 17% upside from current market prices).
That said, if the current company breaks up without someone else picking up the pieces, a de-merger would be a disaster. The company would have to pay more than $2 billion in break-up costs and then would lose a lot of currently existing synergies between the two businesses (above all in the U.S.). If I was a shareholder, I would vote for a break-up only if buyers could be found right next to the exit door.
Federico Zaldua has no position in any stocks mentioned. The Motley Fool recommends PepsiCo. The Motley Fool owns shares of PepsiCo. Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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