Pepsi sweet on Russia, in $3.8 billion WBD deal

By Martinne Geller and Maria Kiselyova

NEW YORK/MOSCOW (BestGrowthStock) – PepsiCo Inc (PEP.N: ) plans to buy control of Russian juice and dairy company Wimm-Bill-Dann (WBD.N: ) for $3.8 billion, making its most ambitious overseas bet yet.

The maker of Pepsi-Cola, Frito-Lay snacks and Quaker oatmeal will also offer to buy the remaining 34 percent of Wimm-Bill-Dann after the first deal closes, as it continues to expand into emerging markets and healthier products.

The deal will make PepsiCo Russia’s biggest food and drink maker and further the trend of U.S. consumer products companies moving into developing markets where an emerging middle class has a growing appetite for branded goods.

“For consumer products companies, you go where the consumers are, and the new consumers are in countries such as Russia and Brazil,” said Frank Aquila, M&A lawyer at Sullivan & Cromwell.

Including $1 billion of debt, Pepsi values the entire Russian company at $5.4 billion, making this the biggest nonfinancial sector deals on record between a U.S. and emerging market company and the biggest-ever deal in the Russian consumer products sector.

Wimm-Bill-Dann’s Moscow-listed shares (WBDF.MM: ) soared nearly 61 percent to 3,700 rubles, lifting Russian consumer stocks as well. Its U.S.-traded shares rose 27.9 percent. Pepsi shares slipped 0.7 percent to $65.20 in New York trading.

‘RICH, BUT … NOT STUPID’

Analysts questioned the deal’s multiple of roughly 18 times projected 2010 operating earnings.

“It’s pretty rich, but it’s not stupid money, given the growth opportunities it opens,” Morningstar analyst Philip Gorham said, noting that other deals in the sector — such as Coca-Cola Co’s (KO.N: ) $4.1 billion purchase of Glaceau — have occurred at similar or higher multiples. “So it’s not cheap, but it’s not daft either.”

The acquisition would make Russia, which will host the 2018 World Cup soccer tournament, the top international market for PepsiCo, replacing Mexico.

Pepsi-Cola was the first Western consumer product introduced to the Soviet Union, some 15 years after former leader Nikita Khrushchev tasted it at the 1959 American National Exhibition in Moscow. Pepsi’s move deeper into the region is a vote of confidence for a country recovering from economic volatility from the global downturn.

Wimm-Bill-Dann’s name, which sounds similar to the Wimbledon tennis tournament, was meant to sound like a foreign brand because of the low reputation of Russia-made products at the time, according to Sergei Plastinin, one of its founders. The company’s brands include J-7 juice and Domik v Derevne milk and dairy products.

Most large consumer products makers, from Pepsi to Kraft (KFT.N: ) to Procter & Gamble (PG.N: ), are investing billions of dollars in cultivating fast-growing emerging markets like Russia, China and Brazil, as growth at home slows.

“The PepsiCo/WBD deal is likely to boost M&A expectations in the food retail space, in our view, where talk is mounting of global operators seeking to enter Russia,” Nomura analyst Mikhail Terentiev wrote in a research note.

Other top Russian consumer names that could attract outside investors include vodka maker Synergy (SYNG.MM: ), drugmaker Veropharm (VFRM.MM: ) and grocery chain Dixy (DIXY.MM: ), analysts said.

But Terentiev said the Wimm-Bill-Dann deal could hit regulatory snags, since it would give Purchase, New York-based PepsiCo control of more than 50 percent of the Russian juice market. Lebedyansky, which Pepsi bought in 2008 for nearly $2 billion, already controls about 32 percent of the juice market.

PepsiCo Chief Financial Officer Hugh Johnston said he expects the deal to clear any regulatory hurdles and sees it closing by the second quarter.

A source at PepsiCo told Reuters the deal was backed by Prime Minister Vladimir Putin at a Wednesday meeting with Donald Kendall — a former chairman and chief executive of PepsiCo who gave Khrushchev the Pepsi at the 1959 exhibition.

BOOST FOR RUSSIA AND HEALTHY DRINKS

This deal is one of the biggest foreign investments in Russia outside the energy sector. French car-maker Renault (RENA.PA: ) paid $1 billion for a 25 percent stake in Russian carmaker AvtoVAZ (AVAZ.MM: ) in early 2008, and has since pledged further investment in the form of technology.

Coca-Cola Co bought Nidan, Russia’s fourth-largest juice maker, earlier this year.

Russia’s finance ministry expects foreign direct investment in Russia to top $40 billion in 2010 and rise to over $50 billion annually in the next two years. In 2009, FDI fell 41 percent to $15.9 billion after the global financial markets crisis.

Pepsi’s price of $33 per American depositary receipt for Wimm-Bill-Dann represents a 32 percent premium to its 30-day average trading price.

Renaissance Capital analyst Natalya Zagvozdina said the premium represented “an unprecedentedly high price” for the Russian consumer market, which suggests there is “enormous interest from Western strategic investors.”

Wimm-Bill-Dann recently bought back an 18.4 percent stake in the company from Danone (DANO.PA: ), following the French company’s merger with Russian dairy company Unimilk.

PepsiCo said the deal, which is expected to dilute earnings in 2010 and 2011 and add 8 cents to earnings per share in 2012, will raise its annual global revenue from nutritious foods — such as oatmeal, juice and yogurt — to nearly $13 billion from around $10 billion.

It also brings it closer to its goal of generating $30 billion in revenue from nutritious products by 2020, as Pepsi seeks to capitalize on consumers’ growing health consciousness.

(Additional reporting by Maria Plis; Editing by Michele Gershberg, Dave Zimmerman, Tim Dobbyn and Steve Orlofsky)

Pepsi sweet on Russia, in $3.8 billion WBD deal