Yes, they carry a lot of risk, since a merger of that size would be tough to swallow, and despite what management teams spout about “synergies,” such acquisitions rarely go as smoothly as expected. But it’s the audaciousness of the proposal where the seeds of success are laid.
Contrast that with what PepsiCo, Inc. (NYSE:PEP) actually has proposed: a new premium bottled water. Yawn.
Seriously, that’s what management brings to the table? Considering there is little to no benefit from drinking bottled water versus what comes out of your tap (most water bottlers use municipal water supplies for their “premium” beverage anyway), and there’s already a plethora of bottled waters on the market — including PepsiCo, Inc. (NYSE:PEP)’s own Aquafina brand — what exactly is Pepsi going to bring to the industry that will define its proposed Om brand differently?
Nestle SA Reg Shs. Ser. B Spons (ADR) (OTCBB:NSRGY) is the industry leader. owning about one-third of the market with Deer Park and Poland Spring brands, and The Coca-Cola Company (NYSE:KO) has its Smartwater, but it’s also besieged at the moment with false labeling claims for its Vitaminwater brand, even if they seem a bit specious. Regardless, PepsiCo, Inc. (NYSE:PEP) doesn’t need to always follow The Coca-Cola Company (NYSE:KO)’s lead, does it?
I understand there are arguments to be made in favor of pursuing this course. For one, it doesn’t cost as much as a multibillion-dollar acquisition, and bottled water is growing in popularity again after several years of decline. According to the International Bottled Water Association, consumption jumped 6.2% to 9.7 billion gallons, while sales rose 6.7% to $11.8 billion.
In contrast, soda sales are falling. The Coca-Cola Company (NYSE:KO)’s soda sales were down 4% in the second quarter, Dr Pepper Snapple Group Inc. (NYSE:DPS) sold 3% less, and PepsiCo, Inc. (NYSE:PEP)’s sales have fizzled in the mid-single-digit range. And Beverage Digest says says per capita consumption of soda has been on the wane since 1998.
Moreover, premium water is different from regular bottled water because consumers have shown a willingness to pay up for it, and those same folks at Beverage Digest say Coke enjoyed a 16% increase in Smartwater sales volume in the first half of 2013. But a new bottled water, premium though it may be, lacks any of the grandness that Peltz’s plan offers. It’s small potatoes — a drop of water in the ocean, if you will — and won’t do anything to move the needle for PepsiCo, Inc. (NYSE:PEP).
Action for the sake of action isn’t always the best course to follow, and sometimes a big move such as buying Mondelez International Inc (NASDAQ:MDLZ) could be a disaster as the meshing of corporate cultures becomes difficult. But we also know that Pepsi is drowning at the moment, and another bottled-water brand lacks the scale and vision to make a big splash.
The article This Idea Will Water Down Pepsi’s Stock originally appeared on Fool.com and is written by Rich Duprey.
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo and owns shares of PepsiCo.
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