The case for an acquisition
Coke and Pepsi have many things that Sodastream International Ltd (NASDAQ:SODA) doesn´t: abundant financial resources, a gigantic global distribution network and enormously valuable brand recognition. On the other hand, they don´t own the same innovative and disruptive product that SodaStream brings to the market.
To put things in perspective, SodaStream spends in marketing in one year what The Coca-Cola Company (NYSE:KO) spends in only two days, yet the innovator has been outgrowing the cola giant by a wide margin. Just imagine what SodaStream could achieve if it had the money, the commercial scale and the branding power of a giant like Coke or Pepsi behind its disruptive products.
If Coke or Pepsi were to acquire Sodastream International Ltd (NASDAQ:SODA) and power its products on a global scale, they would probably have to face some product cannibalization. But like Steve Jobs said, “If you don‘t cannibalize yourself, someone else will.”
Buying SodaStream while it´s still young and affordable would not only provide interesting growth opportunities for the soda giants, it would also mean eliminating a potentially threatening competitor on a long term basis.
In terms of valuation, and even considering that an acquisition would probably mean a considerable premium over market price, SodaStream doesn´t look too expensive at all. The company has a considerable higher P/E and forward P/E ratio than Coke or Pepsi, but when including growth into the equation, the numbers look much better.
Since Sodastream International Ltd (NASDAQ:SODA) has an average expected growth rate of 24.6% annually for the next five years, this means that the PEG ratio – P/E divided by expected growth – is significantly cheaper than in the case of Coke and Pepsi.
An innovative high growth company for a fair price, this sounds like a pretty good deal, especially when seen with the eyes of companies like Coke or Pepsi which could face growing competition from SodaStream in the middle term.
Bottom line
The rumors about Pepsi is trying to buy SodaStream may be completely untrue. However, considering that the company has a compelling and innovative proposition for customers, and that it has been performing exceedingly well over the last years, both Coke and Pepsi have strong reasons to consider an acquisition before Sodastream International Ltd (NASDAQ:SODA) becomes not only a much more expensive company, but even also a competitive threat for these giants.
Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends The Coca-Cola Company (NYSE:KO), PepsiCo, Inc. (NYSE:PEP), and SodaStream. The Motley Fool owns shares of PepsiCo and SodaStream.
The article SodaStream Is a Great Candidate for an Acquisition originally appeared on Fool.com.
Andrés is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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