As The Coca-Cola Company (KO) and PepsiCo, Inc. (PEP) Circle Sodastream International Ltd (SODA), What’s at Stake?

Recent reports that The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) were separately considering bids to purchase upstart beverage manufacturer Sodastream International Ltd (NASDAQ:SODA) have thrown the normally staid soft-drink industry into a tizzy. While the rumors swirling around this situation have yet to be independently verified, it is not difficult to see why Coke and Pepsi would want to purchase SodaStream. Indeed, the company’s potentially disruptive technology could lead to its acquisition at a significant premium to its current price.

Sodastream International Ltd (NASDAQ:SODA) investors clearly hope that these rumors have some substance behind them. Investors responded to news that PepsiCo, Inc. (NYSE:PEP) was considering a $95-per-share offer by driving up SodaStream’s shares by more than 30 percent on an intra-day basis. Pepsi’s swift denial of the claims sent shares plummeting back to their pre-rumor levels. While some investors might interpret such volatility as a warning sign that SodaStream’s investment thesis relies on a “white knight” acquisition, others may see it as a classic arbitrage opportunity or short-term trading play.

Coca-Cola, Pepsi and SodaStream at a Glance

It should go without saying that these three companies are at very different stages of development. Whereas Atlanta-based The Coca-Cola Company (NYSE:KO) and New York-based PepsiCo, Inc. (NYSE:PEP) are mature companies that produce a dizzying array of food and drink products for human consumption, Israel-based SodaStream is a niche business with a signature product that has the potential to disrupt a seemingly stable industry. A quick financial comparison of the three firms is certainly in order.

Sodastream International Ltd (NASDAQ:SODA) is much smaller than Coke and Pepsi. Its current market capitalization of about $1.6 billion fluctuates wildly, but it always remains far below The Coca-Cola Company (NYSE:KO)’s $183 billion valuation and Pepsi’s $128 billion market cap. Likewise, SodaStream’s revenues and income would be little more than a rounding error on either of its rivals’ books. In 2012, the company earned around $46 million on revenues of $466 million. While its 10 percent profit margin is nothing to sneeze at, it is a far cry from Coke’s final haul of $8.7 billion on gross revenues of $48 billion. It is also paltry relative to PepsiCo, Inc. (NYSE:PEP)’s take of $6.1 billion on revenues of over $65 billion.

Sodastream International Ltd (NASDAQ:SODA) is well-capitalized, but its levered free cash flow figure of minus $25 million could soon become troublesome. For the time being, it has a small debt load of just over $8 million and a cash reserve of about $50 million. Meanwhile, The Coca-Cola Company (NYSE:KO) has a debt pile of $35.1 billion, a cash hoard of over $18 billion, and a levered free cash flow figure that exceeds $5 billion by a comfortable margin. PepsiCo, Inc. (NYSE:PEP) has respective figures of $29.4 billion, $7 billion and $6.9 billion.

Competing Offers…

During the first week of June, an Israeli newspaper cited an unnamed official who claimed that Pepsi was about to make a $2 billion offer forSodastream International Ltd (NASDAQ:SODA) at up to $95 per share. Meanwhile, another publication alluded to the possibility of a similar offer from Coke. However, the The Coca-Cola Company (NYSE:KO) story was a bit more vague and lacked specific numbers. Crucially, both reports indicated that each company was waiting for the other to make a move before deciding whether to continue.

…Or Baseless Speculation?

For its part, Pepsi denied the rumors almost immediately. This quickly crushed Sodastream International Ltd (NASDAQ:SODA)’s hours-long rally and sent the stock back down to earth. Nevertheless, recent price action suggests that investors have not completely discounted the rumors. SodaStream currently trades about $7 higher than it did on the day before the PepsiCo, Inc. (NYSE:PEP) rumor broke, and it has exhibited favorable technical behavior that could create short-term opportunities for savvy traders.