Did SodaStream Finally Fizz Out?

Rumors that private investors are looking to take SodaStream private have caused waves in the market today.

Jul 24, 2014 at 3:07PM

According to a report from Bloomberg, SodaStream (NASDAQ:SODA) is in talks to go private. The report cites insiders and claims that a private equity firm is set to offer $40 a share for the fizz-your-own company. That would be about a 20% increase to the stock's current price, and would be the highest point for the stock in, well, about two months. SodaStream's up-and-down ride has been a source of endless frustration for investors who see the value of the business but who have yet to see that value translated into consistent success in the market.

Even if the shares were to hit $40, investors would still be out 20% since the start of the year. SodaStream has been beset by weakening sales and the threat of more competition. In summary, this might be a flat end to SodaStream's once sparkling future.

First mover advantage squandered
The news in February that Keurig Green Mountain (NASDAQ:GMCR) and Coke were teaming up put a damper on SodaStream's outlook. Much of SodaStream's appeal is in the huge discount that avid users can achieve over name-brand, prebottled product. Keurig teaming up with Coke to announce a "Coca-Cola Company-branded single-serve, pod-based" system meant that the advantage that SodaStream has could soon be slipping away.

Keurig popped -- its shares are up 60% on the year -- and SodaStream looked like it could be headed into the history books as an also-ran. If today's rumor is true, it may mean some life remains in the brand. Part of SodaStream's appeal for many investors is that it employs people in a politically and religiously contentious area (its main production facility is in a settlement of the occupied West Bank), bringing diverse people together. One of the downsides is that it's not the cheapest way to make things.

Keurig's operating margin was a healthy 23.6% last quarter, while SodaStream eked out an 11.5% margin. There are other operational concerns for cost, but part of going private may be a move away from higher-priced labor markets. The future of SodaStream's operations would depend heavily on who purchased the business and what the terms of the sale were.

Frustration for the market
Based on the reported bid, SodaStream clearly has some more to give. The suppressed share price was no doubt weighed down by the potential threat that Keurig posed to SodaStream. If the operational model were to change, or if the distribution were to encompass a wider audience, that competition could be less important.

For long-term investors in SodaStream, this is not great news. By making those changes itself, SodaStream could potentially unlock the value that a private bidder may see, and much more. The most vocal proponents of SodaStream often tout the value of the company's distribution network and the growth potential that having that network established produces. That's a long-term view that may have just been chopped off. For investors looking at the SodaStream of 2017, today's news could be a crushing blow. A small bump back to $40 is better than nothing, but you have to believe that even more is possible.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Apple, Coca-Cola, Keurig Green Mountain, and SodaStream. The Motley Fool owns shares of Apple and SodaStream and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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