PepsiCo Buys Israel's SodaStream for $3.2 Billion

After coming under fire from BDS, SodaStream moved from the West Bank to a southern Israeli Bedouin town. The company reported its strongest results in August, reporting a 89% leap in operating profit

Scarlett Johansson in an ad for SodaStream.
SodaStream

PepsiCo is acquiring Israel’s SodaStream International for $3.2 billion in cash, the two companies said on Monday, as the giant American beverage and snacks company seeks new markets outside of its traditional core business of bottled carbonated soft drinks. 

PepsiCo agreed to pay a very high price for SodaStream, which makes machines used to make carbonated drinks at home. The U.S. company will pay $144 a share, a generous 32% premium over SodaStream’s average weighted share price over the last 30 days. That comes after SodaStream’s share price has soared some 85% this year before the deal was announced.

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The news on Monday drove SodaStream shares up nearly 9% to 522.60 shekels ($142.74) on the Tel Aviv Stock Exchange and by a similar amount on the Nasdaq.

President Reuven Rivlin visits a SodaStream manufacturing plant in the Bedouin town of Rahat, southern Israel, June 25, 2018.
Mark Neiman, GPO

The deal caps a hugely successful effort three-year by SodaStream CEO Daniel Birnbaum to turn around the company after it was beset by changing consumer tastes  away from sugary carbonated drinks of the kind that PepsiCo was built on towards healthiest alternatives, including sparkling water.

Two weeks ago, SodaStream reported its strongest results in the company’s history, with a 31% year-over-year jump in revenues to $172 million and an 82% climb by net profit to $26 million.

On Monday, Indira Nooyi pointed to SodaStream’s success in reinventing itself as the reason why she wanted to bring the company into the group as one of her final acts before she steps down as PepsiCo CEO on October.

“Daniel and his leadership team have built an extraordinary company that is offering consumers the ability to make great-tasting beverages while reducing the amount of waste generated,” she said in a statement.

Companies like PepsiCo are also worried about the impact on growing online grocery shopping and consumer tastes for niche products or products they can customize to their tastes.

Other soft-drink producers have tried to tap the home-carbonation segment but without much to show for it. Coca Cola ventured into the segment in 2014 when it bought a stake in Green Mountain Coffee Roasters, but the soft-drink-making system they developed was discontinued two years later.

Founded in the U.K. in 1903, SodaStream devices was a fixture in British kitchens in the 1970s and 80s, but it faded in popularity as bottled soft drinks became cheaper. The company was bought 20 years ago by Soda-Club, an Israeli company founded in 1991 by Peter Wiseburgh.

By the time Birnbaum took over as CEO in 2007, SodaStream was struggling. However, he was successful enough in turning it around that by 2010 SodaStream went public in New York. Its fortunes continued to improve, and there was even a report at the time that PepsiCo might buy it.

The report proved wrong and by 2014 SodaStream was seeing sales and profit drop as consumers turned away from sweet, carbonated soft drinks. Birnbaum revived the company’s fortunes with a strategy of positioning itself as a healthier, environmentally friendly alterative to produces like Coca Cola and Pepsi; that’s because SodaStream users could use the device to make whatever kind of drink they wanted while the bottles used by the devices are reusable.

As its business was being hurt by changing consumer preferences, SodaStream also found itself in 2014 targeted by the international boycott, divestment and sanctions movement because its main Israel plant was in the West Bank settlement of Ma’aleh Adumim.

The company also made waves when it hired Scarlett Johansson to pitch its home-carbonation systems at the Super Bowl in 2014, not least for having to change its ad because of a dig at Coca Cola and Pepsi. The actress herself subsequently came under fire from BDS.

In 2016, the company moved its manufacturing operations to an industrial park by the Bedouin town of Rahat in southern Israel. It had to part ways with hundreds of Palestinian employees who lived in the West Bank and could not obtain permits to work in Israel, but wound up hiring hundreds of new employees, including from Rahat itself. Its move to the south made SodaStream one of the biggest employees in the region.

At a news conference on Monday, PepsiCo’s incoming CEO, Ramon Laguarta, said he had no plans to shake up SodaStream, terming it a successful business that didn’t require any tinkering. He also said PepsiCo had committed to remaining in Israel for 15 years but added he believed it would be here “forever.” As to investing in Israel, Laguarta said he was unconcerned. 

In fact, PepsiCo already does business in Israel. It has a U.S.-based joint venture with Israel’s Strauss Group called Sabra Salads that makes and markets hummus and other prepared salads that was formed in 2007.

Strauss and PepsiCo also produce the FritoLay snack in Israel under a 50-50 joint venture and Pepsi soft drinks have been manufactured and distributed in Israel by Tempo Beverages under license since 1992.