Full disclosure: I own stock in Pepsi
The big business news on Friday was that Coca-Cola purchased
Glaceau brands. You probably know Glaceau as the makers of Vitamin Water, the ultra yummy, vitamin and flavor infused gulp of goodness that started showing up on shelves a few years back. I was introduced to VitaminWater at the local dollar store when their lessor favored flavors showed up for $.19, a bargain for bottled water.
According to press reports, Glaceau has 35% of the water market in the US. That’s an impressive percentage for a company that was founded in 1996. They did $350 or $700 million last year (depending on which “unidentified source” you believe) in gross sales with no mention of what net profits are (that’s the nice thing about being a private company – you don’t have to report your earnings to anyone but the IRS). Their growth in 2006, supposedly, was 103%, an exceedingly aggressive trajectory which speaks to the strength of the non-carbonated drink category.
Coca-Cola purchased their company for a cool $4.1 billion dollars. That’s right, 11.7 (or 6, depending on which source you believe for revenue dollars) times gross earnings. Coca-Cola runs a much larger company than I do, with light years more of management experience so while I criticize this deal, just picture a little 2 year old kicking an 8 foot tall basketball player.
Coca-Cola’s net income was 21.09% last year. That is one impressively high number! Pepsi’s, by comparison, is only 5.24%. Hm, maybe I own stock in the wrong company!? If the average corporation makes
14.2% net profit, Cocoa-Cola is knocking it out of the park and Pepsi is lagging badly. Averaging out these three numbers (5.24 + 14.2 + 21.09= 40.53/3 = 13.51%), gets 13.51%. Glaceau is in a similar industry to both Coca-Cola and Pepsi but not exactly the same, which is why I tossed average corporate profits into the mix. Taking this speculation through to its logical conclusion, if Glaceau’s net profit ranges from 47 to 94 million, Coca-Cola paid 87 to 174 times net profit for Glaceau – an insane overpayment by any measure.
$4.1 billion collars for a company that did ($350 million or) $700 million in sales, which values the company at 10 to 11 times the trailing 12 month revenue. That’s a huge premium, massive by any of the buyout offer calculations I learned in business school. The normal median multiple for a public nonalcoholic drink company is 1.2 times, so not even a measly $1 billion dollars.
One theory is that they had to pay that much because of their late entry into the enhanced water market. Pepsi’s Propel is the number one in the enhanced water market. The enhanced water market is rapidly becoming a major force for profits, sales and acquiring new customers. Coca-Cola had no such operation and with Glaceau’s cult-like status, celebrity fans and wide distribution unit, Glaceau probably looks uniquely position for Coca-Cola and an antidote to Pepsi’s star, Propel.
An interesting side note is that Pepsi just purchased IZZE beverages for 3.8 times revenues – again, a far cry from what Coca-Cola paid for Glaceau.
Tata Tea/Group’s 30% shares in Glaceau are also being acquired. Supposedly, they are being paid $
1.2 billion their shares; those same shares that Tata Tea bought for $677 million just last year. Last August, when Tata acquired their 30%, they valued Glaceau at $2billion. Hm, over 100% growth in value in just a year? They must be selling a lot of water!
“We see the deal as a question mark for Coke,” said J.P. Morgan analyst John
Faucher in a research note. “We think Coke will need to prove it is beneficial
to shareholders to spend $4 billion for the latest “hot” beverage brand.”
This deal brings to mind the massive overpayment for Snapple. Snapple was purchased by Quaker Oats for $1.7billion in 1994 and then sold a quick 3 years later for just $300million. At the time, Snapple was the popular brand du jour with the “big guys” chasing the new, hot market then as well. One can only hope that Coca-Cola manages their new hot brand with better adroitness than Quaker Oats did.
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