Fall 2022: PepsiCo and Celsius

Recommendation for PepsiCo| Board of Directors

Discussion Materials | January 2023

Deal Team

Hometown: London, United Kingdom

Kelley School of Business | 2026

Major: Management

Minor: Economics, Political Science

Micaela Saenz

Hometown: Lima, Peru

Kelley School of Business | 2026

Majors: Finance, Business Analytics

I.

II.

III.

IV.

V.

VI.

VII.

I. Executive Summary

Executive Summary

Overview

Scope of Proposal

Strategic Assessment

• PepsiCo is a multinational food, beverage, and snack company that focuses on providing convenience goods to its customers

• PepsiCo is a global leader in the food and beverage industry with 7 subsidiaries and 23 brands; Their products are sold in approximately 200 countries and territories across the world

• PepsiCo’s consistent growth patterns enable them to continue acquiring food and beverage companies that have shown signs of revenue growth and rise in consumer demand

• This proposal will cover the beverage industry segment

• PepsiCo’s position as a market leader in the beverage industry puts it in a favorable position to acquire an on-the-rise functional beverage company, to further expand their product line

• FIR’s Mergers and Acquisitions Team used their expertise in the industry to present the most viable investment options in order to stay competitive, innovative, and a leader in the industry

Proposal

• Compared to PepsiCo’s core competitors, their energy drink portfolio is underperforming and positioned well to acquire a high-performing energy drink company.

• According to PepsiCo’s 10-K, they have faced substantial headwinds with adapting to the ever changing consumer preferences/behaviors and the acquisition of Celsius allows PepsiCo to adapt better to the consumer preferences in the energy drink market

• We believe this deal will be mutually beneficial, will provide a healthy stream of revenue, and will build on the prior partnership for distribution arrangement between the two companies

Given Celsius Holdings Inc.’s market placement, we recommend the acquisition of Celsius Holdings at an offer price of $120 per share with an issuance of $5B in cash and 24mm PEP shares for a total valuation of 9.61B

II. Industry Overview

Energy Drink Industry Analysis FIR

Energy Drink Market Size, Share, and Revenue

• The industry reflects an oligopolistic market, where RedBull, Monster, and Celsius are front runners in the energy drink industry

• The Energy Drink Industry represents 7% of the non-alcoholic beverage market

Energy Drink Industry Key Statistics

• The global energy drink market is expected to reach $85 billion by 2025 with a CAGR of 7%, according to Jefferies and Euromonitor analysis

• The growing demand for instant energy and a hydration drink among athletes and working professional is anticipated to boost the demand for energy drinks

Trends: Consumer Shift Towards Healthier Stimulants

• There has been an increased willingness in consumers to purchase goods that have a functional benefit and will continue to repurchase if those benefits were to come to fruition

• According to NielsenIQ, 48% of households find health enhancing benefits important when shopping for food and drinks

■ One of Celsius’ key selling points is their ability to create an enjoyable, functional beverage that is low in sugar and calories, while accelerating one’s metabolism and burning fat.

Trends: Demand For Energy-Enhancing Sports Drinks

• Recently, companies have been incorporating stimulant compounds (ie.Caffeine) into their sports drinks to provide a unique taste and attract consumers who want to participate in physical activity for longer periods of time

• Bang Energy: BCAAs, Creatine, Caffeine

• Celsius: Caffeine, Tea Extract, Electrolytes

• Monster Hydro Super Sport: BCAAs, Creatine

• Michael Schulman, CIO of Running Point Capital Advisors, claims that, “we may see a marketing push towards more energy drinks with electrolytes, or electrolyte drinks with energy boosters like caffeine.”

III. Company Overview

PepsiCo (NASDAQ: PEP) Overview

● PepsiCo is a multinational company that oversees the manufacturing, distribution, and marketing of its products

● Founded in 1965 and headquartered in Harrison, New York, PepsiCo has a presence in nearly every country excluding North Korea and Cuba

● Provides 500+ brands to consumers across the globe, resulting in over $79B in net revenue in 2021, driven by their convenient food and beverage portfolio

● Executive Leadership:

○ CEO: Ramon Laguarta

○ CFO: Ram Krishnan

○ General Counsel: David Flavell

● Has several subsidiaries, to include, but not limited to:

○ Frito Lay: Snack company acquired in 1965

○ Quaker Oats: Breakfast cereal company acquired in Aug,2001

○ Tropicana: Juice producer acquired in July,1988

○ Sabra Dipping Co: Middle-eastern food producer acquired in December, 2007

○ Naked Juice: Smoothie producer acquired in January, 2007

PepsiCo (NASDAQ: PEP) Financial Performance FIR

Q3 Financial Summary (USD, in mm)

Total Revenue: 21,971

EBITDA: 5,207

EBIT: 3,353

Net Income: 8,443

Capital Expenditures: (2,556)

Market Capitalization: 251,100

Enterprise Value: 283,930

Diluted EPS: 1.95

Short Term Debt: 3,109

Dividend Yield: 2.52%

Stock Performance (Nasdaq: PEP)

Aug 2022: PEP strikes a distribution agreement with CELH for a $550mm investment for an 8.5% stake

Nov 2022: PEP initiates hundreds corporate layoffs to battle inflation

Dec 2022: PEP begins rolling out fleet of TSLA big trucks

Stock Performance

PepsiCo’s Performance In Comparison To NASDAQ

PepsiCo’s FY’22

Celsius Holdings (NASDAQ: CELH) Overview

• Celsius sells functional energy drinks for pre and post-workout

• Founded in 2004 and headquartered in Boca Raton, Florida, Celsius has seen an upward trend in brand awareness given the recent approval by university/clinical studies for its efficacy

• Studies conducted by the University of Oklahoma, Ohio Research Group, and University of Alabama came to conclude that the thermogenic properties within the beverage led to a loss of calories and body fat, all while providing an energy stimulant to the individual

• Celsius was named the official drink of the Professional Fighters League and Kaulig Racing

• Executive Leadership:

• CEO:John Fieldly

• CFO: Jarrod Langhans

• General Counsel: Marcus Sandifer

• Has one subsidiary:

• Func Foods: Nordic wellness distributor acquired in October 2019

Celsius Holdings (NASDAQ: CELH) Financial Performance FIR

Q3 Financial Summary (USD, in mm)

Total Revenue: 188.23

*EBITDA: (145,050)

*EBIT: (146,404)

Gross Profit: 78,650

S&M Expenses: (198,756)

Market Capitalization: 7,160

Enterprise Value: 8,000

Diluted EPS: (2.46)

Working Capital: 0.755723

Distributor Expense Fee: (155.4)

Stock Performance (Nasdaq: CELH)

Feb 2010: CELH initiates an IPO

Aug 2022: PEP strikes a distribution agreement with CELH for a $550mm investment for an 8% stake

Nov 2022: CELH achieves a 5% market share in the highly-concentrated energy drink sector

IV. Strategic Thesis

Strategic Recommendation FIR

Q3 Financial Highlights

$188.23M Total Revenue

Market Cap

$7,581M

Cash on Hand Gross Profit

$592.13M $78.65M

Competitive Advantages: Rapid Growth

Celsius Holding’s tremendous growth :

1. 98% YOY revenue growth

1. 77% surge in convenience store count

1. 41.8% Gross Profit Margin for Q3

1. Stock price up over 2000% since IPO

1. 153.1% revenue growth in North America

1. Strong Online Presence - As of May, Celsius only trails Monster on Amazon with a market share of 18.23%.

2. Brand Ambassador Partnerships – Over the past year, Celsius has reached partnerships with Dustin Poirier, Heisman trophy winner, Caleb Williams, Shaun White, Julius Randle, and the HBCU’s Orange Blossom Classic Committee.

3. Variety of Flavors - Celsius released their 30th flavor to the marketplace. With their current distribution channel reaching 82,000 stores, there will be a flavor to appease each consumer.

Strategic Recommendation FIR

Energy Drink Usage: The energy drink industry has been growing 6-7% per year and is poised to reach $85 billion by 2025

Performance

Catalysts

Fatigued Society:  According to the CDC, 35% of adults aren’t getting the recommended hours of sleep and 3 out of 5 adults feel more tired than ever, therefore leading to a increased reliance on caffeine to combat fatigue and compensate for the lack of sleep

Increased Utility: In recent years, energy drinks companies like Bang Energy, Celsius, and MATI Energy have released products that have additional benefits whether that is BCAAs, creatine, or tea extracts to attract the older demographics who are more conscious of what they consume

Synergies

Potential Concerns & Mitigations

Revenue Synergies:

● PepsiCo would be able to capitalize and leverage an on-the-rise market disruptor that has a track record of results and potential for sustained growth, which enables PepsiCo to gain a competitive edge and drive revenue growth

● Celsius has the 2nd-largest market share (18.5%) on Amazon, giving PepsiCo additional exposure to the online markets

Cost Synergies:

● Given PepsiCo already has control of Celsius’ distribution network, there will be an ease of transition, economies of scale, and a trend towards positive EBITDA as these costs are reduced due to PepsiCo’s supply-chain management expertise

Other Synergies:

● PepsiCo’s long-tenured relationship with the NFL, UEFA, NBA and newly blossomed relationship with the Qatar Football Association serve as an excellent marketing and brand awareness booster for the newly acquired Celsius

• Celsius is banned by the NCAA, National Olympic Committee, and World Anti-Doping Agency

• Ginseng, guarana extract, and carnitine are key ingredients in Celsius, but are all banned by the above organizations

• While Celsius has shown strong signs of growth, will they be able to compete with giants, Monster and Red Bull?

• Celsius’ current differentiator is their health and functionality, but Monster and Red Bull may catch on in the near future

V. Valuation

Comparable Companies FIR

Discounted Cash Flow Analysis FIR

Discounted Cash Flow Analysis cont. FIR

Football Field Analysis FIR

Average of Valuations Imply a share price of $93.96

VI. Strategic Alternatives

Strategic Alternatives FIR

Strategic Alternatives FIR

• A snack and beverage company with brands like Folgers, Jif, Uncrustables, Smuckers spreads and Milk Bone

• Consistently growing customer base and increasing revenues

• Hold the #1 or #2 rank for 80% of branded retail sales in the U.S.

Risks:

• Institutional investor own a whopping 82% of JM Smuckers

• Lack of an online presence to provide PepsiCo any value

• A snack and beverage company with brands like Belvita, Halls, Oreo, Trident, and Sour Patch Kids

• Recently acquired Clif Bar & Co. in June ‘22 for $2.9B

• Mondelez’s diverse product portfolio enables them to be a consumer staple and stay resilient during economic turmoil and the anticipated recession in 2023

Risks:

• Currency translation losses due to strengthening of USD

• Mondelez forecasted a $0.26 EPS loss in Fy’22

• A solely-online company that sells pet food and pet related products

• They have fully ownership of their distribution network and strive to provide the best pet-related products and the lowest price point

• 73.3% of it’s top line growth came from “autoship” subscription sales

Risks:

• Q3’22 was the first quarter they made a profit ($0.10 EPS), so there is no track record of “success”

• The anticipated recession in 2023 may make it difficult to acquire market share

VII. Deal Review

Deal Review FIR

We proposed the acquisition of Celsius Holdings at a share price of $120.00, which is in line with analyst projections and at a 30% premium.

Deal Overview

While PepsiCo does have AMP Energy and Rockstar under its product portfolio, the acquisition of Celsius Holdings allows PepsiCo to build upon their current relationship with Celsius Holdings as they work towards getting Celsius EBITDA positive.

.

Overall, we believe this proposed deal enables PepsiCo to strengthen their brand and gain a competitive edge against their archrival, Coca Cola, who only have a minority stake (16.7%) in Monster Energy and recently discontinued their own energy drink because of the inability to perform and claims by Monster, the Coca-Cola energy drink violated their non-compete agreement .

Celsius provides a noteworthy amount of upside, but the headwinds are worth noting in order to make an informed decision.

The fees associated with terminating Celsius’ previous partnerships to give distribution rights to PepsiCo were added to the selling & market expenses and have put them at a loss for Q3. However, the $592mm cash on hand, 146.33mm in deferred revenue, and historical net positive quarters mitigate the concerns of Celsius being able to pay off this expense.

Cost-Benefit Analysis

We’ve established ample synergies between the two companies, shown the track record of successes for Celsius, and we believe that PepsiCo will give Celsius the needed exposure to international markets to continue to scale to grow as a market disruptor.

Overall, we believe that the benefits trump the costs noted above and we believe PepsiCo will be able to mitigate some of these risks through effective management and incorporating Celsius into their regular business operations to achieve economies of scale.

Prediction

1.) PepsiCo will begin to close the gap in market cap between themselves and Coca-Cola (232.61B v. 258.41B)

2.) Public support for Celsius by professional athletes thanks to the relationship between PepsiCo and sports organizations

3.) Revenue growth for Celsius in Asian & EMEA regions, attributed to PepsiCo’s strong global presence