Pepsico Inc. (PEP), the leading soft drinks and beverage retailer has agreed to sell the 41.5% stake in Bangkok-based soft-drink maker and bottler, Serm Suk for $213 million. Thai Beverage (ThaiBev), a beverage alcohol company in South East Asia, supported Pepsico’s plan by announcing its offer to buy Serm Suk for $513 million.
Thai Beverage owns and distributes a number of brands including Chang beer, and Mekhong and Sang Som rum. It also has operations in Europe, producing malt Scotch whisky, vodkas, gins, and liqueurs with nearly 20 distilleries in Scotland, France, Poland and Ireland.
ThaiBev seeks to acquire 265.9 million shares of Serm Suk through a voluntary tender offer and will fund the acquisition with cash, accumulated through debt financing.The acquisition will allow ThaiBev to expand the non-alcoholic product portfolio, and broaden its logistic network to traditional trade. The company said the purchase provides it with an efficient returnable bottle system.
Established in 1952, Serm Suk has been an exclusive distributor of Pepsi brands, and will continue distributing PepsiCo products until November next year. Ser Suk cancelled its bottling agreement only after the US beverage giant, Pepsi did not come to terms with its conditions. The cancellation implied that Ser Suk would stop bottling and distributing PepsiCo beverage products in the Thai market within 12 months from the date it terminates its contract.
Snapping more than half-century ties with Thai bottler Serm Suk, PepsiCo may encounter deterrence in distribution plans in Thailand’s $1.2 billion beverage market, Asia’s third-largest after China and India.
Both PepsiCo and Serm Suk had been arguing over the latter’s proposed new formula to calculate the price of concentrates – the new formula would have cut prices by 9% from the previous contract, when PepsiCo actually wanted a 5% price cut. However, nothing fruitful culminated from the argument and finally the shareholders in Serm Suk voted against the contract in April.
A strong new product pipeline, robust international sales and on-going productivity enhancement initiatives are all positives for PepsiCo. However, we are concerned about Pepsico’s vulnerability to currency translations, and the apprehension that the company could face an inflationary impact of approximately $1.4 billion to $1.8 billion.
Currently, we prefer to be Neutral on the stock. Furthermore, Pepsi holds a Zacks #3 Rank, which translates into a short-term Hold rating.
