Pepsi strikes China deal with Tingyi

Pepsi is swapping its bottling operations in China for a 5% stake in Tingyi-Asahi Beverages Holding Company, as well as an option to buy another 15% by 2015. Tingyi-Asahi Beverages has been valued at around $15 billion for the purposes of the deal.

The deal, which sees no cash change hands, comprises 24 bottlers Pepsi currently owns in China. It does not include Pepsi’s bottlers in Hong Kong, Macau and Taiwan. Tingyi-Asahi Beverages will become Pepsi’s anchor bottler in China, responsible for distribution and sales of Pepsi’s beverage brands, including Pepsi Cola, Mirinda and 7 Up, as well as its non-carbonated beverage brands such as Gatorade and Tropicana. Pepsi, which retains the responsibility for marketing, said the structure is one it has adopted in many markets. The US beverage major will continue to independently operate its food business in China, which includes the Lay’s Chips, Quaker Oats and Cheetos brands.

Tingyi-Asahi is 50%-owned by Tingyi Holding and 32%-owned by Japan’s Asahi. Its sales in 2010 were $3.5 billion from a portfolio that includes ready-to-drink tea, bottled water and juice. The terms of the deal also allow Tingyi-Asahi to co-brand its juice products under the Tropicana brand name, under a licence from Pepsi. Pepsi and Tingyi-Asahi’s combined market share will be around 30%, which puts it in a good position to take on Coke in China, according to some specialists.

Tingyi Holding is best known for the Master Kong-brand instant noodles, which it launched in 1992 and is sold in around 75,000 retail outlets in China. It was founded by Taiwanese businessman Wei Ing-Chou, who is chairman and CEO, and is listed in Hong Kong. He said the deal has made the company “ready to welcome a golden age of the Chinese beverage industry amidst intense market competition”.

China is the fastest-growing beverage market in the world and is projected to become the world’s biggest by 2015.

“To win globally, we need to have absolutely the best business partners locally,” said Pepsi chairman and CEO Indra Nooyi in a written statement. She went on to comment that the deal significantly enhanced Pepsi’s beverage business in China in the near term. It will also let Pepsi move its capital-intensive bottlers off its balance sheet while giving it an equity interest in a beverage business that is larger than its current beverage portfolio in China.

The deal is pending approval from Chinese regulators and Tingyi’s shareholders.

Tingyi was advised by J.P. Morgan with legal advice from Sidley Austin. UBS advised Pepsi and Freshfields Bruckhaus Deringer acted as legal adviser. Credit Suisse advised Asahi.