November 7, 2011 / 1:56 AM / 7 years ago

China's Tingyi soars after complex Pepsi deal

HONG KONG (Reuters) - The complex tie-up between China’s Tingyi and PepsiCo Inc got a positive response from investors in the Chinese noodle and beverage maker, sending the company’s shares up as much as 13 percent on Monday.

Pepsi bottles are seen on display in New York July 19, 2010. PepsiCo reports results for its second quarter on July 20. REUTERS/Shannon Stapleton

The deal, detailed on Friday, allows Tingyi (0322.HK) and PepsiCo PEP.N to jointly tap into China’s beverage market through an existing joint venture with Japan’s Asahi Group Holdings Ltd (2502.T).

The fact PepsiCo gets a 5 percent indirect stake worth $55 million in the joint venture in exchange for a bottling operation with a book value of $600 million raised questions though about what PepsiCo may be getting out of the deal.

But the agreement is clearly positive for PepsiCo, bankers familiar with the transaction and analysts said. It allows the U.S. company, which has been losing money in China, to access Tingyi’s vast distribution network.

Tingyi benefits from the addition of PepsiCo products in its distribution chain, including the American company’s popular Tropicana orange juice.

“For Tingyi, their benefit is that they can take new products (from PepsiCo) and that they can pump through their sales and distribution channels,” said Shaun Rein, managing director at Shanghai-based China Market Research Group.

The deal should strengthen Tingyi’s market position, enrich its product mix and increase its bargaining power with distributors and suppliers, RBS said in a note.

Still, the three-way link up was hardly a standard acquisition or joint venture announcement. A partnership involving the need for three companies from different parts of the world to operate efficiently will be challenging, the sources said.

Shares in Tingyi Holding Corp jumped to a two-month high of HK$23.80 on Monday before easing to close at HK$22.80, up more than 9 percent, far outperforming a 0.8 percent loss in the benchmark Hang Seng Index .HSI.

Tingyi shares had been halted on Friday.

Although Tingyi faces the immediate challenge of turning around and integrating PepsiCo’s China businesses, it would gain from PepsiCo’s technology and expertise in the carbonated drinks sector to which Tingyi has little exposure, analysts said.

Tingyi would also gain from being able to co-brand its juice products under the Tropicana name, they said.

“Tingyi has been very successful in beverages, but one of the weakest points of their business is carbonated soft drinks,” said a source familiar with the deal. He declined to be identified as he was not authorized to speak publicly about the deal.

The Tingyi-Asahi Beverages Holdings Co Ltd (TAB) joint venture, which Tingyi said on Monday would be listed in the future, dominates China’s ready-to-drink beverage segment.

It has around 55 percent market share thanks to rapid growth since its establishment in 2004.

Tingyi management expects the integration of PepsiCo’s China business of 24 soft-drink bottlers to take three to five years, said two analysts who attended a Tingyi briefing in Hong Kong on Monday.


PepsiCo’s bottling business has lost money for the past two years partly because the absence of a strong joint venture partner meant it had limited access to national distribution networks, the key to success in China’s food-and-beverage market, analysts said.

PepsiCo’s global rival Coca-Cola has a joint venture in China with state-run China Foods Ltd. (0506.HK), a strategic partner since 2000, RBS says.

SABMiller Plc SAB.L is profitable in China thanks largely to its beer joint venture with state retail-food-beverage conglomerate China Resources Enterprise (0291.HK).

Analysts said PepsiCo would have continued to lose money in China without a local partner. Its China bottling unit incurred an after-tax loss of $175.6 million in 2010, the companies said in Friday’s deal announcement.

Under the agreement, PepsiCo has the option to raise its 5 percent stake in TAB to 20 percent by 2015, when China is projected to become the world’s largest bottled drinks market.

The exercise price of the option is initially based on a $15 billion valuation, Tingyi said.

“If they (PepsiCo) have a channel to sell more volume, I think their business could turn around in a very short time frame. Tingyi is the best partner and can provide that kind of channel,” said the source who is familiar with the deal.

“If they don’t have a partner in China, they just have to give up or keep losing money in China,” he added.

Tingyi’s chairman, Wei Ing-Chou, told reporters on the sidelines of the analysts’ briefing that Tingyi is considering listing TAB, but it was a long-term plan. He declined to elaborate.

That may be one issue that causes friction in the joint venture.

“There will be a lot of conflict,” the source said, adding that Asahi and PepsiCo may oppose the idea of floating TAB because they don’t want to see their stakes diluted.

Still, the source said the time was right for the companies to list the joint venture because its main business of ready-to-drink beverages was already mature.

Additional reporting by Denny Thomas; Writing by Charlie Zhu; Editing by Editing by Matt Driskill and Neil Fullick

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