Employees to get holding in R24.4bn PepsiCo/Pioneer deal

PepsiCo is “very proud” of the public interest commitments that have been “embedded” in its Pioneer transaction, Eugene Willemsen CEO for Africa, Middle East & South Asia PepsiCo told Moneyweb on Friday just hours after the Competition Tribunal approved the R24.4bn deal.

 He would not be drawn on rumours of mounting tension between the merging parties and trade & industry Minister Ebrahim Patel over the percentage of shares to be allocated to Pioneer workers. This is the first major deal to be heard by the Tribunal since Competition Act amendments were introduced requiring merging parties to consider allocating shares to workers and previously disadvantaged individuals. This was in addition to the existing public interest commitments contained in the Act.

The agreement was apparently reached on the various commitments just hours before last Thursday’s scheduled Competition Tribunal hearing. Far from unhappy, Willemsen seemed upbeat about what he acknowledged was a “unique regulatory framework”.

Workers become shareholders

In terms of the agreement with the DTI, PepsiCo will set up a R600 million development fund and will:

• Allocate R1.6bn of PepsiCo shares to a Workers’ Trust.
• The shares will be unencumbered and workers will receive 50% of the dividends in year one.
• The Trust will hold the other 50%.
• After five years, the PepsiCo shares will convert into a shareholding in the South African subsidiary (Pioneer/Simba), up to a maximum of 13%.

“We believe the PepsiCo shares represent a phenomenal investment,” Willemsen said, “It’s a share that has appreciated consistently and it pays dividends in US dollars.”

The Workers’ Trust will be entitled to nominate a director to the local subsidiary with immediate effect.

PepsiCo has also undertaken to invest R5.5bn in greenfield projects in SA “subject to reasonable environmental conditions”. Not only will there be no merger-related retrenchments for a period of 5 years but the Pioneer/Simba operations will create 500 direct and 2 500 indirect employment opportunities in South Africa over those five years.

Long-term play for PepsiCo 

Willemsen said PepsiCo was not discouraged by SA’s weak economic conditions and the current global uncertainty.  The world’s second-largest food and drinks company was speculated to be considering the Pioneer acquisition back in 2017 but pulled out in the wake of the growing political scandal around President Zuma and state capture.

“As a company, we always take a long-term perspective, our perspective hasn’t changed. We see significant opportunities across the continent and Pioneer gives us an excellent footprint to enable us to grow across SA and the rest of Africa,” said Willemsen. For PepsiCo, which owns Pepsi, Tropicana, 7 Up, Doritos, Lay’s and Gatorade, the deal marks their biggest ever outside the US. In 1999 it bought Simba, a SA-based manufacturer of potato and maize-based snack foods.

One analyst told Moneyweb that while the R110 looked generous in the context of the R70 share price ahead of the July 2019 announcement, if PepsiCo does have a long-term perspective it is a reasonably good bargain. “That’s assuming they can realise the opportunities they see more effectively than Walmart managed with Massmart,” said the analyst referring to the $2.3bn retail transaction completed in 2012. Walmart paid R148 per Massmart share which is currently trading at around R43.

Weak rand helped PepsiCo 

The significant weakness in the rand since PepsiCo’s announcement last July provides scope for funding some of the public interest commitments. Last July the Rand was trading at just over R14 to the US dollar, it is currently at R15.6.

The three-year delay has also worked to PepsiCo’s advantage.

In March 2017 Pioneer, whose brands include Weet-Bix cereal, Liqui Fruit Juice, Ceres and Sasko bread, was trading at around R170. Sharp increases in maize prices, tougher competition and a sluggish economy saw Pioneer’s market cap shrink to R15bn ahead of the PepsiCo offer in July 2019.