- PepsiCo entered into an agreement to acquire South African company Pioneer Foods Group for $1.7 billion, reported Bloomberg.
- Pioneer Foods manufactures regional brands of products including cereals and juices, under labels such as Weet-Bix, Ceres, Sasko and Spekko.
- The deal is expected to be completed by the first quarter of 2020 and will result in the creation of a new business unit for the Sub-Saharan Africa region. The new business unit will not alter PepsiCo’s reporting structure and will be under the Europe Sub-Saharan Africa portion of the business.
International investment is hot. As American companies continue to look for growth, increasingly they are looking beyond U.S. borders, particularly toward Asia and Africa.
Although there are many ways to expand globally, for companies with a lot of capital and which are looking to gamble on making big returns, direct local investment through acquisition is a popular route. This approach allows for foreign enterprises to adjust to regional tastes and cultural preferences while also taking advantage of established businesses with existing product demand.
PepsiCo is doing just that by acquiring Pioneer Foods. The South African company has seen a downturn in its stock prices and has been trading at its lowest values since 2013, according to Bloomberg. Until rather recently, PepsiCo and Pioneer Foods had a partnership. The two companies signed a bottling deal in 2006. Pioneer Foods exited the deal in 2014, taking a $3 million write-down to get out of the contract.
Business has changed and now PepsiCo is be taking advantage of the opportunity to work with of some of the South African company’s other brands. These brands could be particularly tempting for PepsiCo because they will help the company move out of the soda space and come into the snack sphere with some well-known South-African brands including Weet-Bix, which has Alpen protein bars.
Following several quarters where earnings exceeded Wall Street expectations, the U.S. soda giant was able to offer a 56% premium for South African company, which Bloomberg reported jumped 31% when the deal was announced. This is good news for PepsiCo. If it is able to increase sales, Pioneer will almost certainly result in a profitable partnership. Without these brands, the company’s Europe Sub-Saharan Africa segment posted $11.5 billion revenue in 2018, which is 18% of PepsiCo’s total revenue.
PepsiCo is not alone in looking at other markets for growth. Tyson invested in the Thai and European poultry operations from BRF SA and frozen nugget and patty provider Keystone Foods last year. Mondelez has also seen significant success through international investment. Since the company was spun off from Kraft Foods in 2012, 75% or more of its total sales come from outside of the U.S. Coca-Cola, PepsiCo’s direct competitor, invested abroad with promises of $100 million in investment in Kenya alone to improve infrastructure and launch new products.
Many companies are looking to build up foreign investment as middle-class populations in previously developing countries begin to explode and demand products that have been commonplace in American markets for years. Likewise, by having an international business arm, companies can shield themselves from potential economic issues at home and use foreign investments as a strategy for recovery and strong reentry into future markets.
South Africa presents a particularly interesting market as it has experienced recent ratings downgrades and routinely experiences political instability. Nevertheless, the country was in A.T. Kearney Foreign Direct Investment (FDI) Confidence Index for 2017. Analysis has shown investment in the country is rising as investors speculate on long-term profits from the developing economy.
With such a forecast, it may take years for PepsiCo to realize profits, but the company stands to earn significant gains by distributing some of the most well-known brands in South Africa.