On March 11, PepsiCo announced an agreement to buy Rockstar Energy for $3.85 billion plus $700 million worth of tax benefits payable over 15 years (BD Email News Alert 3/11/20). Aside from the opportunity to grow Rockstar in the US and internationally, PepsiCo positioned the deal as necessary to shed energy category restrictions that came with a distribution agreement PepsiCo first signed with Rockstar in 2009. In 2018, PepsiCo renewed that agreement for 10 years, according to a Pepsi system source. In an interview with BD last week, CFO Hugh Johnston said buying Rockstar will allow PepsiCo to take Mtn Dew deeper into the energy category. Mtn Dew currently operates on the category's fringe with Kickstart and Game Fuel. PepsiCo also will be free to extend energy credentials to other brands such as Pepsi, following the recent launch of Coca-Cola Energy.
Big Bang? Even more interesting than the potential for growth from Rockstar and Mtn Dew was Johnston’s assertion that the Rockstar deal “opens the door for potential further energy partnerships.” Johnston declined to elaborate, and he wouldn’t comment on the possibility of a significant distribution deal with fast-growing Bang Energy that was rumored in the lead up to the Rockstar announcement. Bang, which has surpassed Rockstar’s share of the US energy category, has accelerated since 2018 to take more than an 8.0 share. Bang’s momentum has since slowed amid supply issues and a defensive entry by Monster Beverages called Reign. “We believe today’s announcement to acquire Rockstar clears the path for PepsiCo to perhaps create a distribution agreement with Bang,” RBC Capital Markets Analyst Nik Modi wrote in a note to investors after the announcement.
Florida Meeting. PepsiCo executives visited Bang executives in Florida earlier this month, according to two sources who have knowledge of the meeting. The exact nature and outcome of the meeting couldn’t be determined before BD published. PepsiCo Beverages North America already has a distribution arrangement with Bang in the Pacific Northwest, centered on the Seattle/Portland/Spokane region. A person familiar with PepsiCo’s thinking said the company’s priorities will include regulatory approval for the Rockstar acquisition and integration, above the pursuit of possible energy partnerships as contemplated by Johnston. A further acquisition by PepsiCo in the energy space is unlikely, the source also said.
Bang-Pepsi Distribution Ties. Bang already has distribution agreements with 22 independent Pepsi bottlers and one unit of PBNA, according to a knowledgeable source at Bang. In total, Bang’s network of distributors totals 347, the source said. The majority are beer distributors (mostly through the AB InBev network). Bang’s own direct store delivery operation handles 13.8% of the company’s total volume, according to the Bang source. Evercore ISI analysts have pegged Bang’s AB InBev US distribution at about 250 wholesale houses, covering roughly 70% of Bang’s volume. If so, that means the Pepsi system handles some amount less than 16% of Bang’s volume. The independent Pepsi distributors carrying Bang are heavily concentrated in the Pacific Northwest, which was largely excluded from PepsiCo’s distribution agreement with Rockstar (founder Russ Weiner already had a strong distribution network in the region that he wanted to retain). Bang’s presence in the independent Pepsi system could present a challenge for PepsiCo when it looks to negotiate deals with those bottlers to carry Rockstar, many of whom carry other energy brands such as C4 and Adrenaline Shoc as well.
Valuation. Adding fuel to the Bang distribution deal speculation is the nearly $4 billion price tag for Rockstar. Analysts at Alliance Bernstein led by Ali Dibadj estimated Rockstar’s 2019 revenue at slightly more than $1 billion, implying an enterprise value to sales multiple of 3.5x. “This is slightly above the average of ~2.5x for transactions in the beverages space since 2000, although by no means egregious relative to some other deals we have seen over the years,” Dibadj wrote. He cited Keurig Dr Pepper’s early 2017 purchase of Bai at about 7x sales or Coca-Cola’s 2007 acquisition of Glaceau for about 12x sales.
More Analyst Reaction. In a report after the announcement, Credit Suisse analysts said they were “positive” on the Rockstar deal, saying the company was showing “a willingness to be an aggressive participant in pockets of growth where the company was previously apprehensive.” As for Bang, the Credit Suisse analysts called a partnership with that brand “risky” given its fragmented distribution system and the likelihood of “more punitive termination clauses” held by AB InBev distributors still smarting from the loss of Monster to Coca-Cola in 2015. Analysts at Guggenheim said in a report that they “like the deal strategically” because it addresses PepsiCo’s “primary weakness,” which is its US beverage portfolio. Evercore ISI suggested in a report that AB InBev also could be in the running for a national distribution deal with Bang.
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