Drinks companies thirsty for change

Data InsightDealspeak 19 April

Drinks companies thirsty for change

Fruit juice is out and fitness drinks are in as beverage companies reposition their portfolios to appeal to younger, health-conscious consumers.

Coca-Cola [NYSE:KO], Keurig Dr Pepper [NASDAQ:KDP], PepsiCo [NASDAQ:PEP] and other beverage behemoths are increasingly investing in products that promote wellness. Energy drinks that make bold health claims are at the center of many portfolio transformations. Sparkling waters, milk alternatives, probiotics and premium coffees are also whetting acquirors’ appetites.

Mega mergers have been sporadic, however, with publicly traded strategics often making minority investments in emerging businesses before deciding whether to take full control. “Strategics have learned it’s hard to grow brands,” an advisor explained. “They aren’t set up for innovation and growth. They are set up for big brands to maximize margins.”

Last year, 26 nonalcoholic beverage companies in North America changed hands for a combined USD 2.8bn, according to Dealogic. But in 2021, a similar number of deals, 28, totaled USD 15.6bn. They included four multibillion-dollar transactions – the most in a year on Dealogic record – led by Coca-Cola’s USD 5.6bn purchase of sports drink maker Bodyarmor, the largest acquisition in the Atlanta soft drink maker’s 136-year history. 

Such interest in transformational deals is causing exits to take longer, observed one venture capitalist. “Ten years ago, if you could get to USD 50 to USD 75m in revenue, Pepsi was interested,” she said. Now, brands generating USD 150m to USD 200m in revenue are being told, “You’re too young for us, you’re too small,” she said. “The goal posts have moved.”

Cutting juice loose

As they overhaul their portfolios, strategics are pouring out the fruit juice. Once a staple in the American diet, juices are in a long-term decline, primarily due to their high sugar content, an advisor said.

Private equity is slurping up these leftovers. PAI Partners paid USD 3.3bn for PepsiCo’s Tropicana, Naked and other North American juice brands in 2021. Currently, TSG and CapVest have been showing interest in Bolthouse Farms’ juices division, this news service reported last month.

It isn’t just juice. Private equity firms are picking up brands in other categories, too. When Nestlé [SWX:NESN] divested Arrowhead, Poland Spring, Pure Life and other American water brands in 2021, two PE firms, One Rock Capital Partners and Metropoulos & Co, bought them for USD 4.3bn.

Energizing the market

Strategics now favor energy drinks, a fast-growing segment that continues to drive beverage dealmaking. In addition to Coca-Cola’s play for BodyArmor, PepsiCo acquired Rockstar Energy Drink for USD 3.8bn in 2020. Last year, Keurig Dr Pepper spent USD 883m for a 30% stake in C4 Energy maker Nutrabolt and PepsiCo paid USD 550m for an 8.5% stake in Celsius Holdings. 

Non-alcoholic beer, wine, and cocktails also have investors salivating. A growing number of alcohol-free adult drink makers are looking to raise capital this year, according to an industry executive, and some spirits makers are launching their own products. Since the beverages are alcohol free, the strict rules governing cross-border distribution of traditional beer, wines and cocktails don’t apply, he noted. That means any company that pushes brands through a large distribution network is a potential buyer.

Four fifths of those consuming this new wave of “mocktails”, “near bear” and other non-alcoholic adult beverages are drinkers seeking alternatives. “Most of them drink alcohol,” the executive said. “They are high-end consumers who want to live a little healthier.”

The biggest deal in the space came last year when Athletic Brewing Company, a Stratford, Connecticut-based non-alcoholic beer maker, raised USD 75m, including USD 50m from Keurig Dr Pepper. 

 “It’s still early,” the executive said. “The movement is much further along in Europe.”

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