PepsiCo, Tingyi tie up to tap China beverages market

HONG KONG Fri Nov 4, 2011 7:06am EDT

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HONG KONG (Reuters) - Chinese instant noodle and drinks maker Tingyi Holdings Corp (0322.HK) will buy PepsiCo Inc's (PEP.N) money-losing beverage bottling business in China, giving the U.S. company's products access to Tingyi's vast distribution network.

In return, PepsiCo will receive a 5 percent indirect stake in Tingyi-Asahi Beverages Holdings Co Ltd (TAB), majority owned by the Chinese food and beverage giant, the companies said in a statement.

PepsiCo will have an option to increase its stake to 20 percent by 2015. The China beverage bottling unit of PepsiCo has a book value of $600 million.

"To win globally, we need to have absolutely the best business partners locally," PepsiCo Chairman and Chief Executive Indra K. Nooyi said in the statement.

Under the alliance, TAB would partner with PepsiCo's current bottlers to manufacture, sell and distribute PepsiCo's carbonated soft drinks and Gatorade brands, while PepsiCo would retain branding and marketing responsibilities for the products, the statement said.

TAB would begin co-branding its juice products under the Tropicana brand name under a license from PepsiCo, and TAB and PepsiCo's current bottlers would have the sole rights to distribute PepsiCo's branded drinks in China, it said.

"The key issue in China is distribution and Tingyi has one of the best distribution networks in China," said a consumer banker at an international investment bank, who is not involved in the deal and declined to be identified because he is not authorized to discuss it.

"They have not only invested in distribution in tier-one cities, but also in tier-two and tier-three cities. They have an extensive network, having the ability to distribute Pepsi brands can mean a lot for Pepsi," he said.

Pepsi said the alliance with Tingyi would provide "better localized service to PepsiCo's national retail and food service customers in China through TAB's distribution expertise."

RARE CASE

The tie-up marks a rare case in the consumer sector of a Chinese company acquiring a foreign stake within its own borders and not the other way around, as brands seek to seize market share and tap China's growing middle class, widening tastes and purchasing power.

Among foreign companies, both Nestle SA (NESN.VX), the world's biggest food group and Diageo Plc (DGE.L), the world's largest spirits group, have made inroads into the country's food and beverage market this year.

Shares in Tingyi were suspended in Hong Kong earlier on Friday after the Chinese-language Beijing Times reported that the company could buy a 51 percent stake in PepsiCo's China operations or "the operating right" to its China business.

"It is more of a win-win deal for both parties," said Linus Yip, chief strategist at First Shanghai Securities, adding that Tingyi could leverage Pepsi's brand to expand its China market share.

Lawrence Chor, an analyst at brokerage Oriental Patron Financial Group, said before the official announcement was made that the deal could also help Tingyi enlarge its product mix.

He said Pepsi could help Tingyi expand its fruit juice business. PepsiCo, maker of Frito-Lay snacks and Quaker branded food products, has one of the most popular fruit juice drinks in mainland China in its Tropicana brand.

Tingyi sells only diluted fruit juice products and has little exposure to the pure fruit juice sector, which is dominated by China Huiyuan Juice Group Ltd (1886.HK) with a 50 percent market share.

Tingyi, which owns the Master Kong brand of instant noodles, drinks and snacks, has a market capitalization of $15 billion after a roughly 20-fold increase in its share price in the past 10 years on rising consumer demand in China.

Instant noodles accounted for 39 percent of Tingyi's first-half revenue, down slightly from 40.75 percent a year earlier. However, beverages increased their proportion of revenue to 58 percent.

Tingyi's net profit for the six months ended June totaled $229.03 million, compared with $197.64 million a year earlier. Turnover for the first half was $4.14 billion against $3.24 billion a year earlier.

MASSIVE MARKET

PepsiCo said last year that it would invest $2.5 billion in its food-and-beverage businesses in China over the next three years.

It had said it planned to open 10-12 new plants in China to manufacture soft drinks, non-carbonated beverages and snacks, and would install additional production lines at existing facilities.

China's massive billion-plus population has long been enticing to foreign brands, keeping most of the focus on inward investment from overseas.

However, attempts by overseas businesses to enter the market have not always been successful.

Coca-Cola Co (KO.N) was blocked by regulators in its $2.4 billion bid in 2009 for Huiyuan Juice, which raised concerns among investors that such deals were effectively off the table.

Nestle, though, is currently eyeing a possible $2.6 billion deal to buy candy maker Hsu Fu Chi International Ltd HSFU.SI. And Diageo, the world's largest spirits group, took a major step forward in June toward taking control of Sichuan Shuijingfang Co Ltd (600779.SS), China's fourth-largest white spirits group.

China food-and-beverage related mergers and acquisitions saw their biggest year in 2010, with 115 deals worth $11.3 billion, Thomson Reuters data shows. Ten years ago there were just 31 deals worth $800 million.

The number of deals this year is on course to match last year's total. However, the value is likely to be smaller with only $4.8 billion of transactions so far in 2011.

UBS advised PepsiCo on the deal, while J.P. Morgan advised Tingyi.

(Writing by Charlie Zhu; Additional reporting by Donny Kwok; Editing by Michael Flaherty, Neil Fullick and Chris Lewis)

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