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Is PepsiCo (PEP) Mulling Over Buyout of Vita Coco Owner?

Zacks Equity Research

In a bid to diversify its offerings amid soft sales, beverage giant PepsiCo Inc. PEP is in talks to buy All Market Inc, the owner of coconut water brand, Vita Coco, as per media reports.
According to Reuters, PepsiCo has offered less than the $1 billion for the deal. However, neither PepsiCo spokesperson nor representatives of Vita Coco commented.

As per data tracker Euromonitor International, Vita Coco is the global leader in coconut water, with 26% market share worth $2.5 billion. Founded in 2004, Vita Coco now spans across 30 countries.

Beverage Giants Seek Diversification as Industry Suffers a Seismic Shift

Growing health and wellness consciousness is hurting carbonated soft drinks or CSD category growth as consumers are particularly vigilant about the use of artificial sweeteners, high-sugar content and related obesity concerns. Among CSDs, the cola segment particularly has been facing challenges as consumers are opting for alternatives. Also, potential new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting CSD sales.

The challenges in the CSD category have been felt by all major soft drink makers - The Coca-Cola Company KO, Pepsi and Dr Pepper Snapple Group Inc. DPS - leading to lower volumes and weak sales. Pepsi's CSD volumes declined 2% each in 2014 and 2015 and 1% in 2016.

Now, good-for-you products as well as bottled water are gradually gaining traction amid the shift in consumers’ preferences. Coconut water has become a prime alternative to coolers across North America and Europe.

As part of the company’s health initiative, PepsiCo has plans of increasing its "everyday nutrition" products, including grains, dairy and hydration, thereby outpacing the rest of its products by 2025.

In North America, the company launched LIFEWTR in Jan 2017, a premium bottled water, PH balanced, with electrolytes for added taste. In 2016, PepsiCo acquired a sparkling probiotic U.S. drinks company, KeVita, thereby diversifying its soft drinks portfolio amid slowing soda sales. Addition of KeVita will expand PepsiCo’s health and wellness offerings in the premium chilled beverage space.

PepsiCo’s competitor, Dr Pepper Snapple acquired antioxidant beverages maker Bai Brands LLC for $1.7 billion in January.

We expect the company's efforts toward offering more products with less sodium, sugar and saturated fat, to reap benefits from a shifting consumer preference toward good-for-you and health and wellness products to bode well.

Zacks Rank & Stock Performance

PepsiCo carries a Zacks Rank #3 (Hold). A better-ranked beverage stock Embotelladora Andina S.A. AKO.B carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Embotelladora Andina is expected to witness a 36.5% rise in 2017 earnings.

PepsiCo's shares gained around 12.7% since the beginning of the year, as against a 13.4% growth of the Zacks categorized Beverages-Soft Drinks industry. PepsiCo beat earnings estimates in each of the trailing four quarters, with an average beat ratio being 4.57%. Notably, the stock has a 3–5 year expected earnings growth rate of 7.4%.

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