PepsiCo Acquires Rockstar Energy for US $3.86 billion

Acquisition Overview

On March the 11th 2020, an announcement of the acquisition of target Rockstar Energy Beverages, an energy drink company, was acquired by PepsiCo, a beverage and food corporation for US$3.86 billion. The challenges are reflected in the price. PepsiCo is paying just a little over 3 times revenues, compared to the 8.5 times publicly listed Monster is valued at. With its deep pockets and drinks expertise, PepsiCo can add value. One example: Rockstar has a notably weak presence on the US east coast and outside the US. That is something PepsiCo can remedy through a ramp up in marketing spend. With PepsiCo advised by Centerview PartnersLLC and Rockstar energy advised by Goldman Sachs & Co, there are definitely a plurality of advantages for both cooperation’s. On top of this PepsiCo will have to pay $700 million of payments related to future tax benefits in accordance with this acquisition over up to 15 years”. PepsiCo Chariman and CEO, Ramon Laguarta have stated

“As we work to be more consumer-centric and capitalize on rising demand in the functional beverage space, this highly strategic acquisition will enable us to leverage PepsiCo’s capabilities to both accelerate Rockstar’s performance and unlock our ability to expand in the category with existing brands such as Mountain Dew,”.

Who is PepsiCo?

PepsiCo is a leading beverage company, its products are enjoyed over a billion times per day by consumers, in over 200 countries and territories. Its portfolio of beverages consists of well-known beverage makers, which include Gatorade, Frito — Lay (25% of revenue and over 50% of their profits), Pepsi — Cola, Quaker, Mountain Dew’s Kickstart and Tropicana. In 2019 it produced more than US$67 billion of net revenue, which is mainly sourced from is beverage portfolio of over 23 brands (each generating more than $1 billion each in approximate retail sales).

What is the business model of PepsiCo?

PepsiCo generation of revenue tends to be derived from that food and beverage. With 53% of revenues coming from food and the remaining 47% coming from beverage business. In 2017 it formulated a sum of $63 billion in revenue, with North America Beverage segment representing 33% of those revenues. 58% of those revenues were in the U.S. PepsiCo has refined its business model to make it as agile as possible. With reduced management layers and by leveraging on digitalisation the food and beverage empire has managed its logic costs to capture as much growth from the world’s market. PepsiCo is separated into 6 main segments. Frito — Lay North America, Quaker Food North America, North America Beverages, Latin America, Europe Sub — Saharan Africa and finally Asia, the middle east and North Africa.

Who is Rockstar Energy?

Founded in 2001, It states on its company profile its “designed for those who lead active lifestyles who lead active lifestyles — from Athletes to Rockstar’s.” Located in more than 30 countries with 20 flavours this energy drink optimal consumer base that of millennials. This energy drink company had a 14% market share in 2009, but this has been diminished by its rivals that of Monster and Red Bull. Rockstar has also been struggling in sales, with only 10% of sales generated overseas; however, with Rockstar in 3rd place in terms of market leader this acquisition will be hugely opportunistic for Rockstar.

Industry Insight of Energy Drinks

In 2018, the global energy drinks market size was $53.01 billion, which is expected to grow at a CAGR (compound annual growth rate) of 7.20%, to potentially reach $86.01 billion by 2026. A key driver for this industry, not only the consumer consumption alternation digressing away from unhealthy soft drinks to healthier options, but also the fact that they contribute immediate energy especially physical and mental stimulation. Furthermore, taurine, another major component, is essential for cardiovascular function and skeletal muscle development. A key factor which determines deals that are driven in the food and beverage industry is for changes in the changing consumer preference deals industry.

PepsiCo Chariman and CEO, Ramon Laguarta have stated:

“Over time, we expect to capture our fair share of this fast-growing, highly profitable category and create meaningful new partnerships in the energyspace.”

The main users involved are kids, adults and teenagers. The adult segment of 2018 has a market share of 45.90%, this segment is forecasted to grow with the highest CAGR of 6.70%, which is mainly due to the fact they are owing to the increase in awareness among healthier consumption habits amount sport athletes.

Strategic Rationale

Looking at the rationale of the deal, specifically what is known as the “eyes of the buyer” it is imperative we question what advantages PepsiCo gain. With Coca Cola and PepsiCo as the biggest pillars of the soft drink manufacturers, demand for soda drinks are decreasing due to consumers amending their consumption and health consciousness habits to healthier alternatives. With energy drinks becoming mainstream and a business growing 2x the overall beverage category, it is clear this is an opportunistic, enticing market to enter! Yet factors stunting the growth of the energy market come from the effects of an overdose of caffeine, which can result in nausea, hypertension and other associate health risks.

We see that the likes of Coca Cola who in 2014 had a 16.7% stake in Monster Energy Drink, which is one of the leaders with Red Bull in second. It has also launched Coca Cola energy, clearing illustrating. In the US total energy drink and energy shot sales, amounted to an approximate $13.5 billion from 2013–2018 a spurting of 29.8%. With Pepsi Co failing Mountain Dew brand, due to consumers shifting from sugary drinks. On the day of the announcement Monster Stock was nearly down 7%, possibly investors believing the entry of a new competitor backed by a PepsiCo, could potentially threatened Monster market position.

One may be asking why this has deal only occurred now, well PepsiCo has had a distribution agreement with privately held Rockstar in North America since 2009. Pepsi CFO Hugh Johnston said that the company’s distribution contract with Rockstar restricted it from innovating in energy drinks or partnering with others. If the deal closes, Pepsi will be able to form partnerships with other energy drink makers, according to Johnston.

Advantages for PepsiCo

· Diversification and Entry into new markets — With a reduction in demand for soft drinks, PepsiCo having a diverse portfolio of an array of soft and energy drinks (Mountain Dew Kick’s Start, Gamefuel and AMP) will allow it to have a sustainable and profitable revenue stream. The strategic reasons for considering are also numerous, mitigating cash flow risk via diversification, expanding distributions and production capabilities as well as possibly to satisfy shareholders hunger for steady growth and dividends.

· Competition — with PepsiCo facing its biggest rival Coca Cola, who is already investing in energy drink companies, such as its Coca Cola Energy. This acquisition places PepsiCo in a good place to compete with Coca Cola.

Advantages for Rockstar Energy

· Geographical Expansion, Growth, competition and increase in market share — With Rockstar only operating in 30 countries in comparison to the global visibility of PepsiCo operating in 200 countries. Rockstar has the ability to develop an international presence and expanding their market shares. This market penetrations strategy is often cost effect than trying to build an overseas operation from scratch.

Its clear that Rockstar has the ability to grow it brand in areas its not operating, potentially creating its market share. With only less than 6% of market share in the US according to Nielsen Data, this is dwarfed by Monster Beverage 42% and Red Bull 35%. Even worse, that Rockstar’s market share is decreasing in each of the past three years. As a result this acquisition has the potential of allowing Rockstar to compete with the likes of Red Bull and Monster Energy will simultaneously having the ability to growing into geographical locations.

· Access to financial capital — With sales and market share diminishing yearly for Rockstar this acquisition will allow it to have access to PepsiCo financial capital, which can be utilised to innovate the business model of Rockstar Energy

Future Prospects

The potential synergies outlined and the extent to which they will be fulffiled is down the current macroeconomic issues. The pandemic has resulted in a hit to consumption of food and beverage with sports on a standstill, and gyms closed consumption of energy drinks will have taken a hit. In addition due to the virus and unprecedented unemployment levels, consumers are decreasing discretionary purchases/expenditures and the extent to which energy drinks fall under this category is a viable option. With the uncertaintiy generated from COVID — 19 it is difficult to predict whether this synergeis will be intergrated. However, some synergies such as Geographical expansion, may be successful, as with the vast unemployment, the expansion into new areas will potentially create job opportunities for people. Yet this correlates with the demand for energy drinks, if demand is not sufficient for this market this may be on hold.

Written by Harinda De Silva - (UCL)