Coke's Russian Drinking Binge

Russia's Moscow Times reports that Coca-Cola (NYSE: KO) has elected to buy itself a bit of growth over in Russia. The company, which failed to capture significant market share when it attempted to enter the Russian juice market with its Minute Maid product, has agreed to buy out Russia's second-largest juice producer, Multon.

Coke, which is a Motley Fool Inside Value recommendation, has not disclosed its purchase price (or indeed, issued a press release on the acquisition), but analysts suggest it will cost the soft drink giant anywhere from $500 million to $650 million to acquire Multon, its 25% market share, and its more than $330 million in annual sales of juice brands such as Rich, Nico, and Dobry.

An unnamed source within Coca-Cola was cited by Russia's Kommersant newspaper (the equivalent of TheWall Street Journal) as saying that what Coke really wants out of this deal is the Rich brand. According to the source, Coke views that brand as enough of a contender in the Russian marketplace to take on PepsiCo's (NYSE: PEP) Tropicana brand, which fared better than Minute Maid when introduced there.

Now consider that even the one analyst who posited the "lowball" $500 million valuation for a Multon buyout thought it a bit more than Multon is really worth. Even if we discount the Coke source's statement that Coke really only wanted one of Multon's brands, it appears that Coke is overpaying for emerging market growth. After all, Wimm-Bill-Dann (NYSE: WBD), the only Russian drink maker that currently sells as a listed U.S. ADR, and for which valuation numbers are more readily available, carries only a 0.7 price-to-sales ratio. Coke, on the other hand, appears ready to pay two to three times that valuation.

That's a pretty high premium to pay to acquire a country's second-largest juice concern instead of its third-largest (and incidentally, Wimm-Bill-Dann is also the country's No. 1 dairy company). And it's not just me saying that. When Wimm-Bill-Dann asked France's Danone (NYSE: DA) to pay just 1.0 times sales last year, Danone walked away.

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Fool contributor Rich Smith has no position in any of the companies mentioned in this article.

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