PepsiCo (PEP) To Acquire KeVita, Foray Beyond Soda Drinks

PepsiCo Inc. (NYSE:PEP) has agreed to acquire a sparkling probiotic U.S. drinks company KeVita, thereby diversify its soft drinks portfolio amid slowing soda sales.

Although the company did not disclose the financial terms of the deal, Fortune reports reveal that the transaction will be worth around $200 million.

Acquisition Details

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 help the digestive and immune health. At present, PepsiCo has Naked Juice and O.N.E Coconut Waters as healthier offerings in its portfolio.

KeVita markets its products as: “Pure and organic beverages that support digestive health and immune function.”

Meanwhile, growing health and wellness consciousness is hurting carbonated soft drinks or CSD category growth. Consumers are particularly vigilant about the use of artificial sweeteners, high sugar content and related obesity concerns.

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.

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.

Hence, addition of KeVita will expand PepsiCo’s health and wellness offerings in the premium chilled beverage space.

Meanwhile, in a separate news release, Dr Pepper has agreed to take over Bai Brands, LLC ("Bai") as well as its entire portfolio of high-growth premium antioxidant-infused beverages in order to expand into the low-calorie beverage market. So it is quite obvious that these beverage giants are ramping up their alternative beverage offerings in the face of declining soda sales.

Zacks Rank & Key Picks

PepsiCo holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A better-ranked beverage stock is Coca-Cola Amatil Limited (OTC:CCLAY) .

For Coca-Cola Amatil, full-year 2016 earnings growth is expected at 10.8% and the stock carries a Zanks Rank #2.

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