NEW YORK (CNNfn) - The choice of the next generation may just be a lizard.|
PepsiCo Inc. beat out Coca-Cola Co. Monday for South Beach Beverage Co., maker of SoBe-brand fruit drinks and iced teas, giving it a foothold in the rapidly growing non-carbonated beverage sector.
A person familiar with the deal put the price tag at about $370 million, about 12 times EBITDA and the same price ratio Cadbury Schweppes paid for Snapple in September.
SoBe makes what are known as "functional beverages" – juices or teas with vitamins or herbal ingredients added – and is the fastest growing company in that segment. The company's top-selling drink, SoBe Energy, is a juice cocktail containing guranara, herbal aphrodisiac yohimbe and amino acid arginine.
"If you really look at what SoBe's, done it's the same thing that the cola companies did," John Bello, SoBe co-founder and CEO, told CNNfn.com. "We provide a refreshing beverage with something in it that gives you a lift."
Bello said the segment, and SoBe, especially enjoys wide appeal with customers and will continue to increase market share.
"Is it a fad? I don't think so," he said.
Since its debut in 1996, SoBe's case sales have grown from 1 million per year to 21 million, and the company has scored a branding hit with its two-lizard logo.
Bernstein beverage analyst Bill Pecoriello said in a report key benefits for Pepsi include participation in a fast-growing, innovative segment, keeping entrepreneurial culture separate from the core carbonated segment, and the possibility of SoBe becoming an incubator for new drinks.
"We believe that the creative, entrepreneurial SoBe culture will work well alongside Pepsi-Cola Company," said Gary Rodkin, Pepsi-Cola North America president and CEO, in a statement. "We intend to give SoBe the freedom and autonomy to preserve its unique culture, plus direct access to the advantages of the larger Pepsi-Cola systems."
Bello told CNNfn.com autonomy was one of the key reasons for SoBe choosing a deal with Pepsi rather than Coke, Pepsi negotiating a three-way deal including private equity firm J.W. Childs Association for 70 percent of SoBe.
Management at SoBe will remain the same and Bello is locked in as CEO for three years.
Pecoriello said for Coke the deal should also serve as a "a wake-up call in terms of acting quickly to get things done in a world where not only consumer tastes are changing rapidly but so is the competitive landscape."
"[The deal with Coke] got too complicated and would have made it difficult for me to do what I do best, which is marketing and sales," Bello said.
"With Pepsi it is a combination of better and more," he said.
With Snapple already gone, Pecoriello said Coke will have to develop its own line internally.
What next for the lizard?
SoBe's goal now is take the market share dominance they have over top player Snapple and No. 3 Arizona in the western third of the country.
"If we had that market share across the country, we'd be a billion-dollar company," Bello said. "And in two-to-three years we will be a billion dollar company."
SoBe is expected to generate revenue of $225 million in 2000, according to Bernstein.
SoBe is getting competition in the value-added sector from Snapple's Elements and Arizon's Elixirs, and while Bello dismissed these as "SoBe wannabes," the company is looking to branch out into new areas.
New products on their way include an energy drink called Adrenaline Rush, a sports drink, and a chocolate drink called Love Bus Brew.
The company is keen to utilize Pepsi's distribution, but only where current distribution is underperforming.
Pecoreillo said "many of Sobe's current distributors are doing a great job" and the company should avoid repeating Quaker's distribution mistakes with Snapple.
Pepsi could also provide a boost with marketing, but Bello said television viewers won't be seeing the lizard logo on their screens anytime soon.
"It's expensive and we don't want to create a brand definition that might exclude some people," he said.
Instead, the firm will continue its practice of grass-roots sampling and marketing, driving its fleet of buses to events and setting up tents.
Shares of Pepsi (PEP: Research, Estimates) rose $2.12 to $49.12 in New York Stock Exchange trading Monday.