It is always something of a shame when a good company gets bought out and goes away, and even more so when the company is a relatively rare play on a market. Wimm-Bill-Dann (NYSE: WBD) is one of the relatively few Russian companies with liquid ADR shares in the United States, and it's an even scarcer consumer goods company. Now, with Pepsico's (NYSE: PEP) proposed buyout of the company, shareholders get a nice parting gift, but international investors are left a bit poorer for choice.
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Terms Of The Deal
Under the deal announced Thursday, Pepsico will pay $3.8 billion (or $33 per ADR) for a 66% stake in Wimm-Bill-Dann. As a condition of Russian law, Pepsico will then be required to make a buyout offer at the same price to minority shareholders. I frankly admit that I am not an expert in Russian M&A law, so I do not know what happens if the minority shareholders elect to refuse the deal. But I imagine that Pepsico would, at a minimum, cancel the ADR program even if it cannot complete a deal for 100% of the shares. (For more, see ADR Basics: Introduction.)
A Big Company That Most Americans Do Not Know
Wimm-Bill-Dann is likely an obscure company to the vast majority of investors who have no particular interest in Russia. That is too bad, as Wimm-Bill-Dann has been an exceptionally well-run Russian consumer products company for many years. WBD is the No.1 player in the Russian dairy market [though soon to be eclipsed in the merger of Danone (OTCBB: DANOY) and Unimilk], No.2 in the beverage/juice market (behind Pepsi, actually) and No.1 in baby food.
It is perhaps a mark of WBD's quality, as well as untapped potential in the Russian market, that Pepsico is paying up for this company. At an enterprise value of about $5.4 billion, Pepsico is paying over 17 times trailing EBITDA and more than eight times book value. Although price-to-book value is admittedly not the best metric for valuation, it does highlight that Pepsico is paying quite a lot relative to other emerging market food companies like China Mengniu (OTCBB: CIADF), China Foods, Coca-Cola Icecek, Anadolu Efes and so on. (For more, see Using The Price-To-Book Ratio To Evaluate Companies.)
The Right Time For WBD To Bow Out?
So, if Wimm-Bill-Dann is a good company in a good market, why would the insiders want to sell? Well, not only is management securing a premium takeout price, but there are reasons to believe that business will get harder. The Danone-Unimilk merger will create a powerful rival in the dairy industry (which is about two-thirds of WBD's business), and Coca-Cola (NYSE: KO), Pepsico and Nestle (Nasdaq: NSRGY) were all threatening to become more serious competitors in Russia. Given their global reach (and manufacturing scale), marketing expertise and so on, WBD management has viewed this buyout opportunity as a sort of "if you cannot beat them, join them" situation.
The Bottom Line
All in all, this is a logical deal for Pepsico, but not necessarily a good one. It is hard to imagine that Pepsico will earn a high enough ROIC on this deal to make it value-creating for its shareholders. This acquisition will make Pepsico's Russian beverage business the dominant player in the industry, and perhaps gives the company new global opportunities in dairy and baby food if the company wishes to go that route. Still, Pepsico shareholders would be wise to question the price of the deal.
For other investors interested in Russia, there are not a lot of great options. Some Russian energy and resource companies are liquid enough, as well as telecoms, but relatively few consumer companies are. A company like Central European Distribution (Nasdaq: CEDC) may be worth a look for its Russian exposure, but investors will have to do quite a bit of homework if they want to make portfolio investments in what is seemingly now the least-accessible BRIC market. (For more, see Is Russia Too Cheap To Ignore?)
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