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PepsiCo Just Put a $550 Million Seal of Approval on Celsius Holdings

Barchart - Tue Aug 2, 3:59PM CDT
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In a deal reminiscent of Coca-Cola’s (KO) 2014 investment in Monster Beverage (MNST), PepsiCo (PEP) announced on Aug. 2 that it was investing $550 million in Florida-based energy drink maker Celsius Holdings (CELH).

In addition to an 8.5% stake in the mid-cap growth company, PepsiCo gains a seat on Celsius’s board of directors and, more importantly, becomes the primary U.S. distributor of the energy drink maker’s products and the preferred distribution partner globally. 

The deal sees Celsius issue $550 million in preferred stock that pays an annual 5% dividend, convertible into 7.33 million shares at an exercise price of $75 a share. 

This is a win/win for both companies. Barring PepsiCo fumbling this partnership, it should provide both shareholders with significant upside for years to come.

Here’s why.

PepsiCo Gains Distribution of a Growing Product

Back to the Coke/Monster deal of 2014, Monster’s sales at the time (2013) were $2.59 billion. In 2021, they were $5.54 billion, a 10% compound annual growth rate. 

Now consider Celsius’s revenue picture.

In 2021, Celsius’s sales were $314.3 million, 140% higher than a year earlier. In Q1 2022, its sales jumped 167% to $133.4 million, with a 217% increase in adjusted EBITDA to $14.7 million. If you annualize its first-quarter sales, its annual run rate in 2022 would be $533.6 million, 70% higher than in 2021. 

Assuming the energy drink maker’s sales continue to grow at a 50%+ pace for the next 3-5 years, Celsius will become a billion-dollar brand sometime in 2024. 

PepsiCo CFO Jarrod Langhans had this to say about the announcement:

“The goal was really to make sure that we were fully aligned and maximizing the potential of the distribution agreement. Having skin in the game, having an investment — we just felt it was important to wrap both pieces together into one,” Langhans stated. 

A vital partnership component is that Celsius becomes PepsiCo’s exclusive functional energy drink for the first 24 months. This gives the company a one-two punch, having acquired Rockstar for $3.85 billion in 2020. 

In addition, this is only the beginning of the partnership. PepsiCo has an opportunity to buy more Celsius in the years ahead. 

“This is just the initial investment,” RetailDive reported Celsius CEO John Fieldly said during the conference call to discuss the deal. “There is [an] opportunity on a go-forward basis for them to further invest in the company.”

You can be sure PepsiCo will be eager to add to its stake if the transition works like both parties think it can. 

This deal gives Celsius distribution in the U.S. and globally, which is deep and broad in scope. Whether it’s selling Celsius on college campuses, convenience stores, mass market retailers, foodservice, and other distribution channels, PepsiCo’s got a much more coordinated network than Celsius. 

As a result, PepsiCo ought to be able to grow Celsius’s distribution network by 40% by this time next year. The growth potential is staggering. 

Celsius Got a Deal It Couldn’t Refuse

While investors may never know who approached whom in this situation, analysts believe the deal is good for both parties. 
Wells Fargo analyst Chris Carey suggested that the deal strengthened PepsiCo’s U.S. energy drink business when its loss of Bang Energy drinks distribution jeopardized its position in this market. Between Rockstar and Celsius, PepsiCo now controls an 8.8% market share in the energy drink category, the fastest-growing in the nonalcoholic beverage industry. 

For most of 2022, CELH stock has trailed Monster Beverage’s stock. However, thanks to PepsiCo's distribution and investment deal, its shares are up 38% year-to-date, compared to a 1% gain for MNST.

Over the past five years, CELH is up 2,663%, compared to 84% for Monster. Long-time Celsius shareholders were likely disappointed by its lack of gains in 2022. The transformational deal puts CELH back on an upward trajectory. 

In addition to what Celsius gains in distribution, it also gets $550 million in cash that it can use for accelerated growth, strengthening its balance sheet, and providing the company with a war chest for possible strategic acquisitions. 

Lastly, although the U.S. market provides plenty of growth ahead -- in 2021, Celsius’s U.S. sales increased by 186% to $273 million, accounting for 87% of its overall revenue -- the opportunity for growth outside of North America could be even more significant because except for Sweden, Celsius has little in the way of international sales.

In Q2 2022, PepsiCo’s revenue outside North America was $8.25 billion, accounting for 41% overall. By Celsius hitching its wagon to PepsiCo’s international distribution machine, it’s hard to fathom the potential growth ahead for Celsius. 

As Mercator LLC research analyst Gianni Poce said about Celsius after the deal’s announcement, it might have “a ridiculously high valuation.” Still, the stock remains one of the few bright spots in the markets in 2022.  
PepsiCo’s $550 million investment makes sense for both sets of shareholders. It’s hard to find a reason why this is a bad deal for either company. 

PepsiCo’s seal of approval suggests CELH stock is about to blow through its all-time high of $110.22. As deals go, this is as win/win as you can get.


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Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.