Pepsico, the world’s third-largest food and drinks company has decided to seal its largest deal ever, out of the United States. Unexpectedly, South Africa is its most preferred destination. Any moment from now, the final gavel would go and Pioneer Foods, the South African local brand which owns major brands like Sasko, Spekko, Liqui-Fruit, Ceres, and Bokomo would become part of the Pepsico’s global portfolio.

“As we look to accelerate our growth in key markets around the world … we are absolutely thrilled to join forces with … one of South Africa’s leading food and beverage companies,” said Pepsico CEO Ramon Laguarta. “Pioneer Foods represents a differentiated opportunity for PepsiCo and allows us to immediately scale our business in Africa.

Now Here Is The Deal And Why Pepsico Is Settling For South Africa

• This is a major acquisition in which Pepsico would be paying a 56% premium to Pioneer’s share price before the deal. Doing so means that Pepsico has seen substantial value in what lies ahead.
• The deal is of much greater significance than the R24 billion PepsiCo will spend on buying Pioneer, says Schalk Louw, a portfolio manager at PSG Wealth.

“It sends a message that one of the largest companies in the world has faith in South African Incorporated,” says Louw.

• It is hugely promising that a massive American company would do one of its biggest deals outside of the US in South Africa — it must mean that it is taking a positive view on the long-term prospects of the country, says Henry Biddlecombe, an analyst with Anchor Capital.
• Two years ago, there were rumours that an international company — very likely PepsiCo — was considering buying Pioneer. But it was apparently scared off by a succession of credit rating downgrades and the political turmoil of the Zuma era.
• Now it’s back, and this time Pioneer is a much bigger bargain.
• In 2017, Pioneer was an R45 billion company — it shrank to R15 billion this year amid a perfect storm that wreaked havoc on its profitability. Rocketing maize prices, tough competition in the bread market and embattled consumers have hurt Pioneer.
• Surprisingly, it seems Pepsico is coming just at the right time. 
• Data showed that South Africans have been shopping more than expected. Retail sales rose by 2.2% in the year to May — while economists were only expecting 1.7%. April’s number has also been revised upwards. Consumer spending represents 60% of the SA economy, which means that the GDP should have expanded in the second quarter, and a recession may have been avoided.
• Apart from Pepsi, the US giant owns Mountain Dew, Lay’s, Gatorade, Tropicana, 7 Up, Doritos, Quaker Foods and Fritos.

Here Is What This Major Investment Could Mean For South Africans

Hope At The End Of A Tunnel?

Expect this to be a major remarkable sign of turn-around for the struggling South African economy. The first phase of a chain of these events has already happened. A 25 basis-point interest rate cut — the first in more than a year was reached last week, and the rand rallied to around R13.82/$ (from R15.02 to the dollar barely a month ago). 

Although it may still be premature to speculate, the Pepsico deal is definitely a sign that South African market may be nearing the bottom of a very difficult period, says Damon Buss, equity analyst at Electus.
Pepsico is paying a 56% premium to Pioneer’s share price before the deal, so it is clear they see substantial value in what lies ahead, Buss added.
Buss believes South African consumers will remain under pressure for the rest of this year, but 2020 should bring relief.

A Deal From Pepsico Is No Ordinary Deal; So Expect More Takeovers

Right now, a lot of companies in South Africa are currently significantly cheap, says Biddlecombe.
Recently, the Israeli firm Central Bottling announced its plans for a takeover of a South African dairy giant Clover. (The deal has hit a stumbling block after protests from a pro-Palestine group, but could still go ahead.) Tiger Brands — SA’s biggest branded food company — could also be a target, given that its share price has halved over the past year, Louw said. The company was hit by the listeriosis crisis, which killed more than 180 people in South Africa.

Louw expects more South African companies to become takeover targets, particularly in the food sector, where companies are cheap after a nightmare period of drought, a rocketing rand, sky-high fuel prices, and depressed household spending.

A Major Win For Consumers As They May Get More At Cheap Prices

“Pepsico is likely going to shake up the consumer market,” predicts Buss.
Under former CEO Phil Roux, Pioneer made some progress to move away from basic commodities (maize meal, bread) to higher-margin branded products. But when Roux left the company in 2017, the current management seemingly struggled to progress, says Buss.

Now PepsiCo will use its considerable global know-how to boost Pioneer Foods groceries brands to a new level, which will mean trouble for Tiger Brands, owner of competitor brands like Albany, Ace, and Tastic. Add to that an increasingly aggressive Libstar, which owns Lancewood, Denny and produces food under the Woolworths and Pick n Pay labels, and competition in consumer products is expected to heat up. This should mean lower prices and better products.

Also, PepsiCo will almost certainly use the Pioneer Foods distribution network to launch some of its products in South African supermarkets, says Louw.

This means more products for consumers to choose from, and also more price competition. PepsiCo may use its massive balance sheet to spend money on promotions establish its new products locally, thinks Buss.

South Africa’s Manufacturing Index May Increase The Largest Now 

“Pioneer Foods forms an important part of our strategy to not only expand in South Africa, but further into sub-Saharan Africa as well,” said Pepsico CEO

While Pepsico noted in its statement on the planned deal that Pioneer will offer it a solid ground for further expansion into Sub-Saharan Africa by boosting its manufacturing capabilities, this is invariably going to lead to a well-drawn battle for the sub-Saharan African market and a major win for manufacturing. Now the fallout of this is that more of Pepsico products could be made locally would be made in South Africa. 

“We think Pepsico is seeing the transaction primarily as an opportunity to expand into Africa, using South Africa as a launchpad,” says Buss.
Will Pepsico also ramp up exports of Pioneer’s South African brands — including Liquifruit and Ceres — to overseas markets? Buss doesn’t think so. “The global beverage market is notoriously competitive.”
However, given that Pepsico is shifting to healthier snacks, the global giant may be interested in Pioneer’s dried-fruit brand Safari, and some of its Bokomo rusk and biscuit brands, for overseas expansion.

Beyond South Africa, Pioneer exports to around 80 markets and has joint-venture operations in Namibia, Botswana, Kenya, and Nigeria.

In late-2014, the pair agreed to terminate their ten-year tie-up in Pioneer’s home market. Pioneer has been PepsiCo’s brand bottler and distributor in the country since 2005 but had to take an impairment charge on the business, prompting the mutual decision to quit.

Charles Rapulu Udoh

Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world.

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