Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Proposing a Value-Enhancing Deal for PepsiCo, Inc. (PEP)

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.
Pros:
– 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.

The article Proposing a Value-Enhancing Deal for PepsiCo originally appeared on Fool.com and is written by Federico Zaldua.

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.

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

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.