Thursday, August 28, 2008

Pepsi Goes Ruskie

PepsiCo (PEP) and Pepsi Bottling Group (PBG) just announced the completion of a 75.53% stake in Russia's leading branded juice company JSC Lebedyansky (RTS: LEKZ), excluding the company's baby food and mineral water business, for US$ 1.4 billion. The original deal had been announced on March 20, 2008. Additional terms of the agreement were not disclosed.

With only four months left in Calendar 2008 PepsiCo and PBG indicated the transaction will not materially affect their previously provided guidance for 2008. Well what about 2009 it’s not that far away? The Russian market is growing double digits in certain categories.

On the other hand the Russian market has proven treacherous for oil companies. It seems that the Russian power elite let them fix up the oil industry and is then confiscating it. Just look at BP. So the political risk is that if Pepsi is successful in substantially enhancing the value of their Russian enterprise who is to say someone in the Russian power elite will not reach out and carve off a few juicy pieces for themselves.

PepsiCo operates as a consumer products company with an implicit risk premium driven by the desire to quench thirst with sugared water. Now you have to factor in political risk. If we worry about the cold war being rekindled with Russian operations in Georgia, you cannot accept Pepsi’s foray into Russia as just another day in the office.