Pepsi's Bigger, but Coke's Smarter

There's an age-old saying in Russia, said to date back to the time of Napoleon's invasion: "Russians take a long time to saddle a horse, but once done, they ride fast."

Thanks to massive investments in automobile manufacturing by Ford, GM, and Toyota, it's getting hard to find equestrian Cossacks to test the second part of that thesis these days -- but the first part sure seems accurate. Fully seven months after we first advised that PepsiCo (NYSE: PEP  ) was in talks to acquire Russia's largest juice maker, the deal finally got done last week. And what a deal it was. Paying $1.4 billion for a 75.5% stake in Lebedyansky, Pepsi is making its second-biggest acquisition ever (behind only the 2001 purchase of Quaker Oats for $14 billion).

The details
Of course, it's getting some help from bottling partner Pepsi Bottling Group (NYSE: PBG  ) , which will team up with papa-Pepsi to do the deal. Also, as it turns out, waiting seven months may have helped the Pepsi twins finagle a better price out of their target. Whereas back in August, we had a 76% stake in Lebedyansky pegged at $1.5 billion to $2 billion in value, it now looks to be as much as 30% cheaper. (That said, Pepsi may still end up paying $2 billion. Russian law requires that it offer to buy out any remaining shareholders after acquiring control of the firm.)

The early bird gets the deal
So what's Pepsi getting for its money? Only Russia's biggest juice maker, commanding a 30% share of a market that is growing at about 15% per year. That works out to $800 million in annual juice sales for Lebedyansky (which also sells some $40 million worth of mineral water and baby food per year, but those operations are getting spun off).

If we assume that the whole firm will ultimately go to Pepsi for $2 billion, the king of pop will be paying 2.5 times sales, and about 23 times the last 12 months of earnings for the company. That seems a fair price if Pepsi can capture the market's sales growth of 15% per year, and bump up earnings growth a bit with some added efficiencies of production. And even if it's overpaying a bit, the fact that Pepsi is leapfrogging Coca-Cola (NYSE: KO  ) in Russian (juice) market share may justify the premium.

Speaking of which, you have to give Coke credit for being the first to saddle up in Russia. Buying No. 2 juicemaker Multon back in 2005, Coke paid a mere 1.5 times sales. And it seems to me the real loser in this race is France's Danone (OTC: GDNNY). Way back in 2004, the yogurt-meister had the opportunity to buy yet another player in the juice game, Wimm-Bill-Dann (NYSE: WBD  ) , for a mere 1 times sales -- and passed. Anybody know what's French for "Doh!"?

For further Foolish musings on the Great Game in Russia, read:


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