EUR 850.00 For Business Accounts Only

Morningstar | PepsiCo Serves Up an Increased Presence in Africa With Pioneer Foods Deal; Shares Fairly Valued

Wide-moat PepsiCo announced July 19 it will acquire South African-based Pioneer Foods, a manufacturer and distributor of food and beverage fare (including cereal and juices), in a $1.7 billion deal expected to close by the end of March 2020. The price tag strikes us as fair, at around 1.1 times trailing-12 months sales and 12 times adjusted EBITDA (based on PitchBook data).

We think Pepsi maintains adequate fund capacity, with more than $10 billion in cash and a debt/adjusted EBITDA ratio of 2.6 times at the end of fiscal 2018. But for CEO Ramon Laguarta (who assumed the top spot in October and at one point during his more than two decades at the firm served as head of Europe Sub-Saharan Africa), we view this as an early indication he has an appetite for select tie-ups to diversify Pepsi’s geographic and category exposure. In this vein, Pioneer should build out Pepsi’s presence in Sub-Saharan Africa, while also building out its scale and distribution in the region. For reference, when combined with its European business, ESSA represented just shy of one fifth of fiscal 2018 sales, a region we expect will chalk up mid-single-digit top-line gains annually over our 10-year forecast. However, we don’t expect Pepsi will veer from its past prudence under Laguarta’s leadership, nor do we expect any tie-ups to jeopardize its ability to reinvest in its core operations and return excess cash to shareholders. As such, we’re standing firm on our Exemplary stewardship rating.

Given the deal represents just a low-single-digit percent of sales, we don’t posit it warrants altering our $126 fair value estimate or long-term outlook for 3%-4% average annual sales growth and high-teens average operating margins (200 basis points greater than the average level generated between fiscal 2016 and fiscal 2018) over the next decade. Shares trade 5% above our valuation, though, and we think investors should await a more attractive risk/reward opportunity before building a position.