NEWS ANALYSIS

pepsico
Tertius Carstens (left), CEO of Pioneer Foods, and Eugene Willemsen, CEO, PepsiCo Sub-Saharan Africa
  • The world's third-biggest food and drink company wants to buy South Africa's Pioneer Foods.
  • The deal is significant for a number of reasons - including the vote of confidence in SA's economic prospects.
  • SA consumers may also benefit from more product choice and, perhaps, lower prices.
  • For more stories, go to Business Insider SA.

While South Africa's politics may be in turmoil, the long-suffering economy caught a couple of breaks this week:
  • A 25 basis-point interest rate cut – the first in more than a year.
  • The rand rallied to around R13.82/$ (from R15.02 to the dollar barely a month ago).
  • Surprising 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.
  • Ford announced that it would add 1,200 more jobs at its Silverton plant outside Pretoria.

And on Friday came the news that world’s third biggest food and drink company is making one of its largest investments ever outside of the US in South Africa. PepsiCo wants to buy Pioneer Foods, which owns major brands like Sasko, Spekko, Liqui-Fruit, Ceres, and Bokomo. Apart from Pepsi, the US giant owns Mountain Dew, Lay's, Gatorade, Tropicana, 7 Up, Doritos, Quaker Foods and Fritos.

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 a 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.

Here’s what the takeover could mean

The SA economy may be close to a turning point

It’s still very early days, but the PepsiCo deal does signal that the local 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.

He believes SA consumers will remain under pressure for the rest of this year, but 2020 should bring relief.

More SA companies could become takeover targets

Some companies in South Africa are currently astonishingly cheap, Biddlecombe says.

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.

Recently, the Israeli firm Central Bottling announced its plans for a takeover of local diary 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.

Consumers could get more products, at lower 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.

Read: R24 billion later, Pepsi could finally have a fighting chance against Coke in South Africa – and maybe we’ll get Funyuns too

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.

More manufacturing in South Africa

In its statement on the planned deal, PepsiCo says Pioneer offers it a solid beachhead for expansion into Sub-Saharan Africa by boosting its manufacturing capabilities. This implies that more of its products could be made locally.

"We think Pepsico is seeing the transaction primarily as an opportunity to expand into Africa, using South Africa as a launch pad," 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 interest in Pioneer’s dried-fruit brand Safari, and some of its Bokomo rusk and biscuit brands, for overseas expansion.

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