It's beginning to resemble a corporate game of geographic tic-tac-toe.
You know the strategy, right? The first player to move makes the obvious choice, occupying the center square of the board. The second player grabs a corner spot, and the opposite diagonal corner with the next move -- setting up the possibility of a two-pronged attack when claiming either of the two remaining corner positions. Well, that's what we're seeing on the playing board known as the former Soviet Union.
Just two years after Coca-Cola (NYSE: KO ) strode into the Russian juice market with a buyout of No. 2 player Multon, archrival Pepsico (NYSE: PEP ) followed suit last week with a buyout of its own -- in Ukraine. Knowing that Coke wanted to extend its reach into next-door Ukraine with a purchase of that nation's largest juice maker, Sandora, Pepsi joined the bidding, acquiring an 80% stake in Sandora for $542 million plus debt.
(A few days later, the salt-and-soda magnate grabbed the opposite corner on the board, announcing it will invest $170 million over the next five years to build a snacks plant in Azov, Russia.)
The two soft drink titans' geographic struggles aside, I think the big story here is the rapid rise in valuations going on behind the crumbling remnants of the Iron Curtain. Consider:
- In 2004, Russia's Wimm-Bill-Dann (NYSE: WBD ) asked France's Danone (NYSE: DA ) to pony up one times sales to buy it out. Danone refused and walked away.
- By 2005, that decision looked pretty silly, as Wimm's sales skyrocketed to the point that the firm's valuation dropped to 0.7 times sales.
- By the time Coke made its Multon purchase, it had to pay 1.5 times sales for the prize. (At the time, the purchase price was a mystery, but in a subsequent 10-K filing, Coke revealed that it had paid $501 million to capture Multon's $330 million revenue stream.)
Fast-forward to today, and what do we see Pepsi paying for Sandora? The $542 million price tag on the first 80% of the company suggests a value of about $680 million for the whole firm. According to Ukraine's Agrooglyad: Vegetables and Fruits publication, Sandora booked $99 million in sales in 2004, and has annual turnover approximating $200 million today. That translates into 26% compound annual sales growth, for which Pepsi is paying 3.4 times sales. From one perspective, that looks like a bargain that could add needed international growth when you stack it next to Pepsi's own three-times-sales multiple, but more sedate 9% sales growth rate.
Still -- at the risk of making sour grapes out of the juice acquisition -- it's a real shame that Pepsi didn't snap up this prize a couple of years ago, when ex-Soviet juice makers were selling for just a fraction of today's prices.
For further Foolish musings on the Great Game in Russia, read: