Will SodaStream's Investors Get Burned From a Buyout?

Source: SodaStream

July 24, 2014 was a fantastic day to own shares of SodaStream (SODA). After news broke that an unnamed private equity firm might acquire the business for $828 million (or $40 per share), the company's stock shot up to close 9% above its prior day's closing price of $28.90.

At first glance, this may seem like a tasty deal for the company's shareholders. But given the fact that shares traded as high as $69.78 less than a year ago before falling out of fear that slower growth and competition from a joint effort between Coca-Cola (KO 0.12%) and Keurig Green Mountain (GMCR.DL) would stifle the business, are shareholders getting the short end of the stick?

SodaStream has been an amazing growth story!
Over the past three years, SodaStream went through one heck of a growth spurt. Between 2011 and 2013, the company's revenue soared 95% from $289 million to $562.7 million. The biggest contributor to this growth was the company's second largest segment: the Americas. During this three-year period, revenue in the Americas shot up 160% from $83.9 million to $218.2 million as management succeeded in capturing the interest of its U.S., Canadian, and both Central and South American customers.

Source: SodaStream

Of course, this wasn't the only region SodaStream saw attractive growth in. Over the same time frame, sales in the company's Western Europe segment jumped 75% from $153.2 million to $268.5 million, while its Asia-Pacific segment grew 108% from $21 million to $43.6 million. The picture here looks strong to say the least, but the real story isn't necessarily the growth management achieved. Rather, it's the composition of growth that matters most.

Between 2011 and 2013, sales of SodaStream's soda makers and exchangeable CO₂ cylinders rose from $125.6 million to $233.1 million, falling from 43.5% of consolidated revenue to 41.4%. Meanwhile, the company's consumables category (which consists of the business' soda mix) soared from $157 million to $317.8 million, rising from 54.3% of sales to 56.5%.

Source: SodaStream

In the short run, it's imperative that management experiences growth in its soda makers and exchangeable CO₂ cylinders because the units sold dictate the size of the company's user base. In the long run though, it's imperative for SodaStream to see revenue growth in its consumables category. This is because as the company's market matures, these higher-margin sales will make up most of the business' profits and -- through new product offerings -- sales growth.

Is SodaStream going the way of the dinosaurs?
In light of SodaStream's success, beverage king Coca-Cola decided to get into the mix. As of the end of its most recent fiscal year, Coca-Cola's revenue amounted to $46.9 billion, up less than 1% from two years earlier. In an effort to increase its sales growth, the company struck a deal with Keurig Green Mountain in February that it hopes will grab a sizable piece of SodaStream's niche market.

Source: Keurig Green Mountain

As part of its agreement, Coca-Cola acquired 10% of Keurig Green Mountain for $1.25 billion, giving it a nice-sized stake in the company's upside. With revenue having increased by 64% over the past three years from $2.65 billion to nearly $4.4 billion and Coca-Cola's equity position in the company currently valued at almost $2 billion, the opportunity moving forward is tremendous.

Even bigger than its ownership in the business, however, is that Keurig Green Mountain agreed to develop a system to distribute single-serve pod-based cold beverages bearing the Coca-Cola name. This will, undoubtedly, give Coca-Cola a catalyst to grow its sales while increasing the worth of its new business partner.

This will hurt, but not necessarily kill, SodaStream
In 2013, $26.5 billion (or almost 57%) of Coca-Cola's revenue came from the North America and Latin America regions, up from $25.3 billion (or 54%) of its revenue in 2011. Although SodaStream's exposure to the same regions has increased over the past three years, the company derives a more modest 39% of sales from the area. What this means is that while Coca-Cola and SodaStream are growing fastest in areas outside of Europe, the latter's core European market is much more integral to the company than it is to Coca-Cola.

Source: Coca-Cola

In fact, between 2011 and 2013, Coca-Cola's revenue coming from the region actually declined almost 3% from $5.47 billion to $5.33 billion, while SodaStream's shot up 75% to $268.5 million. This is great news for SodaStream because although Coca-Cola's and Keurig Green Mountain's upcoming products will likely impair SodaStream's presence in the Americas, the impact in its largest segment will likely be negligible.

Foolish takeaway
Right now, SodaStream's shares are soaring because of a potential bid for the business by a private equity firm. In the short run, this will allow shareholders who get in now an opportunity to collect some nice upside should a deal go through. But for investors who are focused on the long run (as all Foolish investors should be), the deal may not be a takeover but may instead be a take-under from SodaStream's true value.

Yes, the business does face slowing growth and it does face increased competition, but with the latter likely being non-fatal to the company, SodaStream might make for an interesting prospect. This is especially true when you consider that the alleged takeover price values the business at just 20 times earnings, less than the 22 times earnings the much larger, slower-growing Coca-Cola can be bought for.

For this reason alone, the Foolish investor might consider buying up a piece of SodaStream. Not because there's the chance to grab a quick buck but instead because the true value of the business appears to be significantly higher than what the company's shares are trading for.