Is PepsiCo (PEP) Mulling Over The Buyout Of KeVita?

PepsiCo Inc. (NYSE:PEP) plans to acquire a sparkling probiotic U.S. drinks company KeVita, as per media reports. This move will diversify PepsiCo’s soft drinks business.

According to Reuters, the acquisition may close this month and will likely value the privately held company at less than $500 million. This will be PepsiCo's first buyout under its Naked Emerging Brands.

However, a PepsiCo spokesperson declined to comment on any "rumor or speculation” and KeVita could not be reached for comment.

Growing health and wellness consciousness — consumers are particularly vigilant about the use of artificial sweeteners, high sugar content and related obesity concerns — is hurting carbonated soft drinks or CSD category growth. Among CSDs, the cola segment was particularly dealt a blow as consumers are opting for alternative beverage offerings. The diet colas are also under pressure due to increasing consumer concern regarding the use of artificial sweeteners. Also, potential new taxes on sugar-sweetened beverages and growing regulatory pressure are denting CSD sales. The challenges in the CSD category have been felt by all major soft drink makers – The Coca-Cola Company (NYSE:KO) , Pepsi and Dr Pepper Snapple Group, Inc. (NYSE:DPS) – leading to lower volumes and weak sales.

Moreover, consumer tastes are shifting from CSDs to non-carbonated beverages. Though PepsiCo has increased marketing investments and is driving package and product innovation to boost the carbonated beverage business, no meaningful improvement has been seen yet. The company’s CSD volumes declined 2% each in 2014 and 2015 and 3% in the first nine months of 2016.

Meanwhile, founded in 2010, KeVita’s products include sparkling probiotics, master brew kombucha tea and vinegar tonics. It is important to note here that probiotics mainly helps digestive and immune health. At present, PepsiCo has Naked Juice and O.N.E Coconut Waters as healthier offerings in its portfolio.

Zacks Rank

PepsiCo carries a Zacks Rank #2 (Buy). A better-ranked beverage stock Primo Water Corporation (NASDAQ:PRMW) carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Primo Water is expected to witness a 140% rise in 2016 earnings.

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