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>>> Pepsi to Buy SodaStream for $3.2 Billion in Shift to Healthier Drinks

Cola giant faces pressure to overhaul North America beverage business as core brands stumble


By Saabira Chaudhuri and Jennifer Maloney

Aug. 20, 2018


https://www.wsj.com/articles/pepsi-continues-move-away-from-sugary-drinks-with-sodastream-deal-1534749310


PepsiCo Inc. PEP -0.10% has agreed to buy one of its fiercest critics, seltzer-machine maker SodaStream International Ltd. SODA 9.44% , for $3.2 billion, the latest move by the beverage-and-food giant to broaden its offerings beyond sugary sodas and salty snacks.

Israel-based SodaStream SODA 9.44% makes countertop machines that allow consumers to carbonate tap water and other beverages at home by filling a reusable bottle and flavoring it with syrups. As consumers have shifted from sugary soft drinks to bottled water, the Nasdaq-listed company has pivoted to promote itself as a maker of homemade seltzer rather than a maker of homemade soda.

PepsiCo has been under pressure this year to restructure its North America beverage business amid weak sales of its core brands Pepsi-Cola, Mountain Dew and Gatorade. The sales slump came after the company last year shifted too much shelf space and advertising money to new, healthier brands.

The deal creates somewhat of an awkward pairing. SodaStream has singled out PepsiCo and other beverage companies in public statements and advertising campaigns criticizing bottled-water makers for polluting the environment.

“Shame on PepsiCo,” SodaStream Chief Executive Daniel Birnbaum said last year when the soda giant launched its premium bottled-water brand LIFEWTR. “I’ll say it till I’m blue in the face: The bottled-water industry is the biggest marketing scam of all time.”

Americans Still Consume Too Much Sugar in Drinks

The U.S. soft-drink industry vowed in 2014 to cut beverage calories in the American diet 20% by 2025. But a drop in diet soda consumption and the rise of energy drinks has slowed progress.

“SodaStream’s point of view is that they want a healthier, more sustainable planet,” a goal the soda giant shares, PepsiCo finance chief Hugh Johnston said in an interview. “There was a good cultural match here in terms of the values.” In discussions between the two companies over the past several years, “we got more comfortable that, in fact, we think about things in the same way,” he said.

A SodaStream spokeswoman referred questions to PepsiCo.

Shares in PepsiCo rose after the announcement but later erased those gains and closed off 12 cents at $114.84. SodaStream’s shares rose 9.4% to $142.111. Wells Fargo analyst Bonnie Herzog offered a skeptical view of the deal, saying it is questionable whether buying SodaStream will do much to help PepsiCo’s efforts to improve volumes in its North American drinks business.

Mr. Johnston said the deal isn’t a response to the company’s flagging North America beverage sales, but rather an opportunity to expand SodaStream’s sales around the world and to give PepsiCo better reach into markets such as Germany and Japan, where SodaStream is strong. It also gives PepsiCo entree into what Mr. Johnston called “in-home beverage creation.”

Under departing Chief Executive Indra Nooyi, PepsiCo has expanded from its cola roots into hummus, kombucha and other healthier products, although results have been mixed. The company has set a target for sales growth of nutritious products to outpace the rest of the portfolio by 2025.

Incoming PepsiCo CEO Ramon Laguarta played a key role in the SodaStream deal, two people familiar with the matter said.

Mr. Laguarta, who is currently PepsiCo’s president, approached Mr. Birnbaum about four weeks ago about doing a deal, one of the people said. The pact came together quickly, with no other bidders involved, both people familiar with the matter said.

PepsiCo had built a yearslong relationship with SodaStream under Ms. Nooyi, who expected the company would help the soda giant pivot to the healthier and more environmentally friendly offerings she envisioned. PepsiCo had previously approached SodaStream at least once in the past eight years, people familiar with the matter said. In 2015, PepsiCo briefly sold its cola with SodaStream machines as an experiment in a few dozen stores across the U.S.

In addition to LIFEWTR, PepsiCo sells the Aquafina water brand in the U.S. and earlier this year launched a new brand of flavored seltzer called Bubly.

Sparkling water has grown more quickly than the overall bottled water category in the U.S., clocking volume growth of 38% last year, according to data from industry tracker Beverage Marketing Corp. That compares with 7% growth for the overall packaged-water industry.

Bubbling Up

U.S. sparkling-water consumption has grown sharply in recent years.

Consumers are turning to fizzy water as a replacement for sugary soft drinks and diet sodas. Meanwhile, sales of bottled water—a much bigger category—have slowed amid competition from sparkling water, tea, coffee and other beverages.

The Israeli company has courted controversy in recent years because its former location—in the West Bank town of Ma’aleh Adumim—made it a target for campaigns urging consumers to dump its products if the company remained in disputed territory.

In 2014, SodaStream gave in to the political pressure and announced it would move its headquarters to Tel Aviv and its manufacturing operations to southern Israel.

The countertop carbonation-machine maker is widely accepted to have invented the notion of make-it-at-home soda and has roots going back to 1903, when it was founded in London by a gin distiller.

In early years it was marketed to Britain’s upper class, and was reportedly a favorite of the royal household. But home carbonation of tap water eventually took off and the company’s heyday came in the 1970s and 1980s, reaching 10 million U.K. homes, alongside a marketing catch phrase: “Get Busy With the Fizzy.”

A series of changes of ownership, which included Reckitt & Coleman and Cadbury Schweppes, grounded momentum. Eventually the company was bought by Soda-Club, its Israeli distributor. Then private equity took a controlling interest, appointed Mr. Birnbaum—previously the Israel CEO of U.S.-based sports-apparel company Nike Inc.—as CEO, and listed the stock in 2010. SodaStream now has 2,000 employees.

Earlier this month SodaStream reported its revenue had climbed 31% to $171.5 million for the quarter ended June 30, while its net income rose 82%. The company described the quarter as its best to date.

A backlash against single-use plastic has taken hold in some countries in Western Europe, where SodaStream makes the majority of its sales.

One SodaStream ad featuring “Game of Thrones” actors Hannah Waddingham and Thor Bjornsson has captured 2.7 million views on YouTube. It parodies a scene from the television series, with a woman crying “Shame!” as she follows a man carrying bottled sparkling water out of a grocery store.

As recently as this month, SodaStream had been planning a fall campaign “against single-use plastic bottles and big beverage,” a company spokeswoman said in early August.

PepsiCo said Monday that buying SodaStream is one of several ways in which the soda giant is reducing the use of plastic bottles. Others include Drinkfinity, a kit that includes reusable bottle and recyclable flavor pods, and Aquafina water stations, which dispense water with or without flavors in offices and on college campuses.

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