Running head: PEPSICO SODASTREAM MERGER 1

PepsiCo SodaStream Merger

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PepsiCo SodaStream Merger

Introduction

The Soda Production business offers energy drinks, traditional carbonated soft drinks, as

well as different carbonated flavored drinks. Within the previous five years, the performance of

the soft drinks industry was affected, leading to it falling per capita. Both the diet and regular

carbonated soft drinks demand has diminished as more users turn to more healthier beverages.

Additionally, strong coverage by the media regarding the disadvantageous effects of sugary

refreshments ultimately broke the producers’ bubble and as a result, a decline in revenue to an

approximated 0.5 percent in 2018 alone.

Terms of the deal

PepsiCo is the second largest player in the food and beverage industry in the world and

offers a diverse range of products. One can attribute the firm's success to its generic business

strategies, availability of products, pleasant taste, low-price model, and convenience of

purchasing. Principally, the firm utilizes the cost leadership and broad differentiation strategies

to acquire a competitive edge over its rivals in the dynamic food and beverages industry. These

approaches are crucial to building a strong brand association and memories among the users. The

firm is in a stable state to dominate the beverages and food industry considering its enviable

growth pattern and robust financial position.

PepsiCo Inc. agreed to acquire fizzy-drinks distributor SodaStream International Ltd. for

3.2 billion dollars, which extends the organizations synonymous with sugary sodas into the

homes of more health-conscious consumers (AFP and Solomon, 2018). PepsiCo agreed to pay

the Israeli company 144 dollars per share in cash. Indra Nooyi, PepsiCo CEO’s final act is using
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a razors-and-blades type of business approach to restoring the growth of revenue, which has been

declining because of a weak market for the traditional sugary soft drinks (AFP and Solomon,

2018). SodaStream sells machines used with cooperative carbon dioxide capsules and optional

flavored syrups, and its success in locking in consumers enabled it to raise its full-year outlook

recently. According to PepsiCo, the move will also boost sustainability since the consumers can

fill reusable bottles (AFP and Solomon, 2018).

The shares of SodaStream have increased 49 percent after the firm raised its estimate for

revenue growth to 23 percent as well as announced first-half figures, which beat the estimates.

SodaStream's stock had a 10 percent increase to 143.36 dollars in the premarket trading within

the United States (AFP and Solomon, 2018). With the sales of soft drinks hurting in previous

years since consumers are shying away from the sugary beverages, Daniel Birnbaum,

SodaStream's CEO shifted the firm’s marketing to concentrate on producing carbonated water.

SodaStream and its leadership team have created an extraordinary organization, which offers

customers the capacity to make great-tasting beverages as well as decrease the volume of waste

produced (AFP and Solomon, 2018).

In this light, major producers within the industry have started creating new soda products

to mitigate significant losses following the lower rate of consumption. PepsiCo Inc. launched

new mid-calorie sodas, which appeal to the customers who resent the diet soda taste but they do

not want regular sodas because of the calories. Other major soft-drink producers have attempted

to penetrate the at-home business, even though success is difficult. In 2014, the Coca-Cola

company ventured into the section after buying a stake in Green Mountain Coffee Roasters,

although the soft-drink-making method they created was suspended in 2016 because of its weak

demand.
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PepsiCo and SodaStream Operation performance overview

The food and beverages industry is characterized by intense competition, and it is

necessary that a firm in this sector continue experimenting and innovating to become successful.

It is a fact that PepsiCo has strategically positioned itself in the market by developing nutritious

and low-calorie products to complement its ordinary soda beverages (Eades, Thornhill, & Eades,

2017). Most of its customers are aged between 13 and 35 and come from the various income

segments including lower and upper classes. It also has a range of affordable soft drinks, which

makes it easier for teenagers and other members of the millennial generation to connect with the

products. Fundamentally, the company uses different generic competitive strategies to address

the diverse categories of consumers and products but employs two main approaches to achieve

Sustained Competitive Advantage (SCA) against its competitors. These strategies are cost-

leadership and broad differentiation. Overall, PepsiCo utilizes the cost-leadership and broad

differentiation strategies to acquire a competitive edge over its rivals in the dynamic food and

beverages industry.

SodaStream's previous attempt at becoming a soda brand was tragic seeing that the

consumption of soda was declining within the United States as well as worldwide. In this regard,

SodaStream’s product was uncompetitive compared to PepsiCo and Coca-Cola. Nonetheless,

SodaStream seems to have solved this issue by remodeling its brand to that of sparkling water.

Currently, numerous consumers find the product more attractive regarding its pricing since it is

competing with expensive bottled waters (PepsiCo, 2018). However, SodaStream is currently

benefiting from consumer trends’ tailwinds because numerous consumers are drinking sparkling

and bottled water because they perceive it as a healthier choice compared to regular soft drinks.
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Unlike SodaStream, PepsiCo is a global brand with a presence in over 200 countries and

the parent company to Pepsi, a premier beverage in the market for more than 100 years.

Fundamentally, it is the second largest player in the world within the food and beverage industry,

which offers a diverse range of products (Ferguson, 2017). Its generic competitive strategy is

founded on the necessity to deal with the market pressure originating from its major rival, that is,

the Coca-Cola Company. Principally, the goal of any business strategy is to attain a sustainable

competitive advantage and deliver excellent products to the consumers at a relatively lower price

than its main rival (QuickMBA, 2007a). The firm's success can be attributed to its generic

intensive approaches that create value for its customers and guarantee long-term growth. The

company has been able to achieve sustained competitive advantage in a dynamic food and

beverages market due to the availability of its products, convenience of purchasing, pleasant

taste, and low-price model.

SodaStream is a leading distributor and manufacturer of Sparkling Water. The business

allows consumers to transform regular tap water into sparkling water easily including flavored

sparkling water. By making regular tap water exciting and fun to drink, the firm helps the

consumers drink water more. Makers of sparkling water allow a highly innovative and

differentiated solution to canned and bottled carbonated soft drink consumers. The SodaStream

products promote wellness and health, are environmentally favorable, customizable, cost-

effective, as well as fun to utilize.

The other approach that the organization uses is that of the broad differentiation. In this

strategy, the development of the product is done in a manner that provides distinct attributes that

customers treasure and is perceived to be superior to those of the competitors (QuickMBA,

2007b). PepsiCo utilizes it as its secondary generic competitive approach to attract clients to the
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firm's unique product features. For instance, the company's potato chips use minimized saturated

fat content to be presented as a healthful snack to the customers. Overall, the organization’s

strategic objective in applying this approach is to establish products, which health-conscious

consumers can use. Therefore, PepsiCo utilizes a broad differentiation strategy to provide

distinct attributes in its products that could appeal to a broader client base.

SodaStream Valuation

An individual can utilize different methods to value a business. In reality, the valuation of

a is usually a combination of various approaches. In this regard, among the most extensively

applied quantitative approaches is the market multiples process. A market valuation is generally

used as a primary market contribution, to present an objective preliminary point for an

assessment (Info Analytics, 2019). In simple terms, this approach multiplies a business’ profits

or sales by an industry-average multiplier, which calculates the business’ Market Value.

Present multiples comprise:

- Historical multiples following standardized financials for the previously ended fiscal

period: LTM (the Last Twelve Months);

- Forward multiples following consensus estimations for the present fiscal period as well as

the next ones NTM (Next Twelve Months), FY0, FY1.

 Present multiples following per-share metrics (for example, book value per share or

earnings per share) are estimated using the previous closing price, whereas current

multiples following company-level metrics (for example EBITDA, EBIT, or net sales)

are estimated utilizing the Enterprise Value (EV) or current market cap (Info Analytics,

2019).
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The most popular multiple that stock valuations use is the N/A multiple P/E(Price to

Earnings). Price to Earnings relates the present share price to the market prospect concerning

Earnings Per Share. One uses the multiple to compare an organization’s value in the market with

the business’ earnings. A firm with a significant N/A is thought to be overvalued; whereas a

business with a much lower N/A is thought to be undervalued. In this regard, SodaStream’s N/A

is significantly low compared to its peer group’s median: around 13.00 (Info Analytics, 2019).

SodaStream’s company valuation following these metrics is lower than its peer group’s market

valuation.

SodaStream’s N/A ratio is quite low compared to the average within its division (Durable

Household Products): 13.30. SodaStream’s company valuation according to the metrics is lower

than its sector’s market valuation (Info Analytics, 2019).

Valuation

P/E (e) P/E

P/E Last 2019 NTM

International Peers Free Free Free

trial trial trial

Durable Household 12.09 13.63 13.30

Products

N/A N/A N/A N/A

Israel 7.59 10.33 11.56

Retrieved from https://www.infrontanalytics.com/fe-EN/40128GE/SodaStream-International-

Ltd-/market-valuation
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SodaStream’s ratio is significantly low compared to its 5-year historical average: 20.0.

The (present) SodaStream company valuation is thus lower than its valuation average within the

previous five years (Info Analytics, 2019).

International Peers - SodaStream International Ltd.

Market Year-To-Date
Beta
Company Name Ctry Cap. Price Change
1-Year
last (mUSD) (in local currency)

SodaStream Internationa... ISR N/A N/A N/A

International Peers Median 0.96 19.8%

Rinnai Corp. JPN 3 450 0.72 2.9%

Whirlpool Corporation USA 8 804 0.95 28.7%

Gree Electric Appliance... CHN 38 036 1.10 19.8%

Arcelik A.S. TUR 255 570 0.96 26.9%

Qingdao Haier Co., Ltd. CHN 14 230 1.29 13.9%

Retrieved from https://www.infrontanalytics.com/fe-EN/40128GE/SodaStream-International-

Ltd-/market-valuation

SodaStream Comparable companies

If an individual wants a soda maker that is entirely unaffiliated with SodaStream, then

Bonne O is an option that one ought to consider. Bonne O is a new product, which offers

carbonation including the capacity for an individual to infuse his or her drinks with different

flavors, which is a feature SodaStream lacks. In addition to that, Bonne O independent from

SodaStream since it has its refill system. Therefore, instead of utilizing carbonation cylinders,
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which a person has to refill often, Bonne O has carbonator tablets, which are excellent for one

use as well as can carbonate a whole 750 ml bottle. However, when one considers its pricing, it

is at the mid-point. Bonne O refills are expensive at $0.9 per liter if one buys the carbonators in

bulk (sodamakerclub, 2019).

While KitchenAid manufactures a high-quality soda maker, it still relies on SodaStream’s

replenishing system. In this sense, if an individual wants to avoid SodaStream completely, he or

she ought to seek different soda makers. The KitchenAid Sparkling drink producer is a great

option compared to the SodaStream machines. KitchenAid is the most solid of every soda maker

in that it has a metal construction as well as will last long (sodamakerclub, 2019). Besides,

KitchenAid is highly realistic to utilize with its snap-lock mechanism, which makes it easier for

an individual to attach his or her bottle to the soda maker. The device’s carbonation lever comes

with a handy CO2 meter, which allows a person to see how carbonated his or her drink is, which

gives it a personal touch of preference.

SodaStream Discounted Cash Flow

SodaStream has often soared past the expectations of analysts. Whereas the brand’s

earnings beats have lessened in the latest quarters as SodaStream’s earnings grow, the business is

still constantly beating expectations. Whether it is due to the conservative guidance by the

management or the outcomes exceed the business, is unclear. Nonetheless, the pattern ought to

continue since the firm is executing on its every strategic objective. Hence, the year’s first

quarter is historically at its weakest, which ought to drive investors to expect EPS to improve

during the year.

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SodaStream is the center of contention within the Middle East. Different protesters claim

victory after the organization closed a West Bank factory in 2014. SodaStream argues that

protests and boycotts have hurt Palestinians and not helped them. Strategic choices involve the

entire process of deciding on a specific option from a list of alternatives. Various approaches can

be used to make such a conclusion, but in all cases, the decision makers have to integrate both

the internal and external environment of the company in the decision-making process (Banerjee

& Homroy, 2018). For instance, a firm such as PepsiCo has to use an effective business-level

strategy such as the cost leadership to determine the extent of providing low prices to attract

more customers but still retain quality and profitability. Similarly, the company creates

economies of scale to maintain the low selling price for its products. Overall, PepsiCo adopts

strategic choices in making decisions that would facilitate sustained growth and competitive

advantage.

SodaStream Present-Day Term Valuation

Competitive Comparison Data

Ticker Company Market Cap (M) WACC %

SODA SodaStream International Ltd $ 3,263.40 0.00

SHSE:603486 Ecovacs Robotics Co Ltd $ 3,360.35 0.00

SHSE:603816 Jason Furniture (Hangzhou) Co Ltd $ 3,372.15 0.00

SHSE:603515 Opple Lighting Co Ltd $ 3,408.44 0.00

TPX Tempur Sealy International Inc $ 3,080.29 11.57

TSE:5947 Rinnai Corp $ 3,494.22 4.79

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Ticker Company Market Cap (M) WACC %

SPB Spectrum Brands Holdings Inc $ 2,902.82 5.60

XPAR:SO Somfy SA $ 2,740.34 5.07

LSE:HWDN Howden Joinery Group PLC $ 3,933.88 3.11

TPE:8464 Nien Made Enterprise Co Ltd $ 2,452.05 9.17

Retrieved from

https://www.gurufocus.com/term/wacc/SODA/WACC/SodaStream+International+Ltd

SodaStream Consolidated forecast and valuation summary

One of the company’s strength is that it has a strong brand image. It is a fact that the firm

has built an excellent reputation that is visible in more than 200 countries in the world and an

international brand that appeals to many people (Venkataraman, Summers, &Venkataraman,

2017). One way of maintaining an upward growth trajectory in its brand image is by creating a

high top of mind awareness and visibility across the globe. Its generic strategies of cost

leadership and broad differentiation are crucial to building a strong brand association and

memories among the users. The other strengths that PepsiCo has are a broad product mix, robust

financial performance, and global presence.

To some extent, all these advantages align with its generic strategies with the only

significant discrepancy being regarding the commercial agenda. Most of the company's product

portfolios have positive returns on the balance sheet, but the vast array of these portfolios is not
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popular with external stakeholders. Additionally, the firm does not explicitly state the influence

of risks on its costs, which, in turn, causes the discrepancy concerning the cost-leadership

approach. Therefore, PepsiCo's strategic choices do not necessarily align with its strengths

especially regarding the aspects of commercial agenda and influence of risks on the costs.

The organization has significant internal strengths that run through the vision statement,

various business units, and different levels of operations. Despite the numerous advantages, the

company has a low penetration rate outside America, limited business portfolio, and poor

marketing strategies especially among health-conscious consumers (Young, 2017). These

weaknesses persist regardless of the firm’s secondary generic approach of broad differentiation.

The organization should enhance its health-consciousness campaign to align with its strategic

choices and cause a positive impact on its core products. Its health issues extend beyond

consumers to the company's fiscal health, which should be enhanced to minimize

overdependence on the American market. For example, many underperforming beverages could

be replaced, removed from the portfolio, or marketed to maximize growth potential. Therefore,

the weaknesses that the firm depicts do not align well with its generic strategies, and there is a

need for a more focused approach to deal with issues of consumer and fiscal health.

PepsiCo is in a stable state to dominate the beverages and food industry based on its

excellent growth pattern and strong financial position. The firm has made several strategic

acquisitions to keep pace with market trends and shifts in consumer needs. Therefore, the

company can leverage its intricate network of distribution and supply chain to enhance growth

and cover itself from emerging risks. Despite these successes, the organization can alter its

strategic choices to take advantage of its strengths and underpin its weaknesses. For instance, the

firm can use digital technology and e-commerce to enhance customer experience and understand
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their consumption and demand patterns. Specifically, the use of IoT can assist the company to

know when the equipment requires maintenance and control energy consumption.

Moreover, the firm should adopt a niche or focus strategy to maximize its limited

resources and establish a unique identity (QuickMBA, 2007a). These alterations would reaffirm

the organization’s mission of being a leading consumer products company that focuses on

providing convenient foods and beverages. Moreover, it will strengthen its vision of

administering a long term top-tier financial performance. Consequently, the aspects of its

ambitions as a leader within the industry, innovativeness, and technology would be confirmed by

these changes and be used to revise its mission and vision statements. Therefore, PepsiCo can

alter its strategic choices with the aid of technology and niche strategy to reaffirm its vision,

mission, or values statements and even revise them to include components of the market leader,

innovativeness, and technology.

Conclusion

PepsiCo is the second largest player in the food and beverage industry that offers a diverse

portfolio of products. This sector is characterized by intense competition that requires a firm to

continue experimenting and innovating to become successful. Fundamentally, the company

utilizes the cost-leadership and broad-differentiation strategies to acquire a competitive edge

over its rivals. The former approach focuses on the broader market and seeks to build a

competitive advantage by maintaining the lowest cost of operation, while the latter method

provides distinct attributes, which customers can treasure and perceived to be superior.

Moreover, the company uses strategic choices within the confines of the external and internal

environment to make decisions and achieve sustained growth and competitive advantage.
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Despite its excellent performance, PepsiCo should alter its strategic choices and introduce

aspects of technology and niche strategy to reaffirm its vision, mission, and values statements.

Overall, the company primarily employs cost leadership and broad differentiation business

strategies in its operations and could enhance them further by introducing the niche strategy and

technology to leverage its strengths and underpin its weaknesses.

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References

7 Great Alternatives to SodaStream Machines - Soda Maker Club. (2019). Retrieved from

https://sodamakerclub.com/sodastream-machine-alternative/

AFP and Solomon, S. (2018). PepsiCo completes acquisition of Israel’s SodaStream. Retrieved

from https://www.timesofisrael.com/pepsico-completes-acquisition-of-israels-

sodastream/

Analytics, I. (2019). SodaStream International Ltd.: Market multiple valuation (SODA | ISR |

Durable Household Products) - Infront Analytics. Retrieved from

https://www.infrontanalytics.com/fe-EN/40128GE/SodaStream-International-

Ltd-/market-valuation

PepsiCo. (2018). PepsiCo Completes Acquisition of SodaStream International Ltd. Retrieved

from https://www.pepsico.com/news/press-release/pepsico-completes-acquisition-of-

sodastream-international-ltd12052018

SodaStream International WACC % (SODA). (2019). Retrieved from

https://www.gurufocus.com/term/wacc/SODA/WACC/SodaStream+International+Ltd