Bloomberg News

PepsiCo Swaps China Bottling With Tingyi to Expand Drinks Share

November 07, 2011

Nov. 5 (Bloomberg) -- PepsiCo Inc. will swap its bottling operations in China for a stake in Tingyi (Cayman Islands) Holding Corp.’s beverage business in an effort to narrow the gap with Coca-Cola Co. in the world’s fastest-growing drinks market.

PepsiCo will transfer equity interests in bottling operations in China to Tingyi-Asahi Beverages Holding Co., Tingyi said in a statement yesterday. In exchange, PepsiCo will receive 5 percent of Tingyi-Asahi, with an option to increase the stake to 20 percent by October 2015.

The alliance will “significantly” enhance PepsiCo’s beverage business in China in the near term, Chairman and Chief Executive Officer Indra K. Nooyi said in a separate statement. It will also maximize “PepsiCo’s future growth potential in the fastest-growing beverage market in the world,” she said.

“It’s a smart deal for Pepsi because bottling plants are a non-core asset for them and trading the asset for a stake in Tingyi will benefit them in the long run,” said Titus Wu, an analyst with DBS Vickers Hong Kong Ltd. “With Tingyi’s vast distribution network in China, PepsiCo can go deeper across the country and make its products available in more smaller cities, where competitors may find it difficult to reach.”

PepsiCo Investment

PepsiCo, which ranks fourth in China’s soft-drink market, has been investing in the world’s most-populous nation to catch up with leader Coca-Cola. Purchase, New York-based PepsiCo said in May last year that it plans to invest $2.5 billion in China in the food and beverage businesses over a three-year period, including in manufacturing plants and research and development.

Tingyi estimates it will gain $257 million from the stake swap with PepsiCo, the Tianjin, northern China-based company said. The actual amount to be booked will likely be different since the estimated figure is only based on latest available financial information, according to its statement.

Jeff Dahncke, a PepsiCo spokesman, declined to comment on the financial impact of the transaction on the company. The deal is subject to approval from regulators in China and Tingyi’s shareholders.

Tingyi-Asahi, a venture between Tingyi, Japan’s Asahi Group Holdings Ltd. and Ting Hsin (Cayman Islands) Holding Corp., sells ready-to-drink tea, bottled water and juices, and will become PepsiCo’s franchise bottler in China under the alliance. It will also make, sell and distribute PepsiCo’s carbonated- soft-drink and Gatorade brands, according to a statement from the U.S. company.

The company will also co-brand its juice products under the Tropicana brand on license from PepsiCo, Tingyi said.

Branding

PepsiCo will continue to own the branding of its products, Dahncke said. PepsiCo’s drinks brands include Seven-Up and Tropicana, and its food products include Cheetos, Lays potato chips and Quaker cereals.

Coca-Cola is the dominant soda maker in China with a 16.8 percent share of the soft-drink market last year, according to London-based researcher Euromonitor International. Tingyi ranked second with 14.4 percent, closely held Hangzhou Wahaha Group Co. was third with 7.2 percent, and PepsiCo was at No. 4 with 5.5 percent, the data show.

The soft-drink market, a category that includes carbonates, fruit and vegetable juice, ready-to-drink tea and bottled water, is worth 332.7 billion yuan ($52 billion) in China, Euromonitor said.

Coca-Cola and its Chinese bottling partners will invest $4 billion in the Asian nation over three years from 2012, it said in August. The money will help build bottling plants, boost distribution and develop new cold drinks for the maker of Fanta, Nestea and Glaceau Vitaminwater, Coca-Cola spokeswoman Zhao Yanghong said at the time.

Billionaire Owner

Tingyi, controlled by Taiwanese billionaire Wei Ing-chou, produces and distributes instant noodles, drinks and baked goods. Its profit rose 16 percent to $229 million in the six months ended June 30 as instant noodles sales gained 22 percent, the company said Aug. 23.

The company competes with Want Want China Holdings Ltd. in China, where consumer prices rose 6.1 percent in September.

Tingyi suspended trading in Hong Kong yesterday and will resume trading at 9 a.m. on Nov. 7. The shares slid 1 percent to HK$20.80 in Hong Kong trading Nov. 3. The stock has gained 4.5 percent this year, compared with a 14 percent decline in the benchmark Hang Seng Index.

PepsiCo fell 1.3 percent to $61.96 at 1:06 p.m. in New York trading.

UBS AG was PepsiCo’s financial adviser and Freshfields Bruckhaus Deringer was its legal counsel, according to the U.S. soda maker’s statement. JPMorgan Chase & Co. advised Tingyi and Sidley Austin LLP acted as legal counsel.

--Stephanie Wong, Michael Wei, with assistance from Janet Ong in Taipei, Penny Peng in Beijing and Anjali Cordeiro in Hong Kong. Editors: Lena Lee, Suresh Seshadri.

To contact Bloomberg News staff for this story: Stephanie Wong in Shanghai at swong139@bloomberg.net; Michael Wei in Shanghai at mwei13@bloomberg.net

To contact the editors responsible for this story: Stephanie Wong at swong139@bloomberg.net; Philip Lagerkranser at lagerkranser@bloomberg.net


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