Tingyi – PepsiCo Alliance

Tingyi – PepsiCo Alliance: Tingyi Asahi Beverage (TAB) acquires 100% of PepsiCo bottling business (CBL) in China; PepsiCo gets 5% stake of TAB and the option to increase to 20%. After the transaction, Tingyi’s interest in TAB will reduce 2.5% for 47.5% interest in CBL. If PepsiCo exercises options, Tingyi’s interest in TAB and CBL will further reduce to 40%. The deal needs approval from MOFCOM.

Expand product portfolio in Tingyi’s beverage platform: Tingyi will gain an exclusive license to produce and distribute Pepsico’s non-alcoholic beverage businesses in China, including carbonated soft drink (CSD), Gatorade branded sport drinks, Tropicana branded juice products and co-branded juice drinks. Currently, Tingyi do not have carbonated soft drink products but is strong in tea & water. The deal enriches the product portfolio.

The key is how Pepsico can turnaround: The margins of bottling business are low. CBL had suffered US$175mn loss in FY10. Tingyi said that the loss-making was related to 1) concentrate prices; 2) selling expense is high; 3) supply chain not efficient. The company has renegotiated concentrate price with Pepsi. Tingyi’s distribution channel and expanded product portfolio will also help to improve efficiency. It is expected that it will take 3-5 years for organization and management restructuring.

Management cautiously optimistic on beverage sector: Tingyi expressed the recent situation of China beverage industry. The chairman pointed out that beverage demand slowed in 2H and believed the sector will continue to be tough next year. The reasons include: 1) economic slowdown has affected demand on tea, and consumers shift to water; 2) some small players are aggressive in pricing; 3) consumers preference diversifying and mainstream categories losing market share, which the Chairman believes should be temporary.