EDITORIAL: PepsiCo deal could add fizz to flagging economy
Last week signalled the beginning of the serious courting period for PepsiCo as it attempts to tie the knot with Pioneer Foods. The next 12 or so months will be full of promise, interspersed with occasional frustrations, as the US-based food and drinks group tiptoes through a potential minefield of shareholder and regulatory approvals.
The scheme conditions run to a few pages and while backing from all of Pioneer’s minority shareholders — as well as those at its controlling company Zeder — can’t be taken for granted, the biggest challenge is likely, if history is anything to go by, securing approval from the competition authorities.
As expected, there is much talk of the great things that will come from the merger — not just for shareholders but for SA. As with all courting processes, romantic fervour can help to dull perception of some of one’s future partner’s more challenging characteristics. Advisers and bankers, whose fees depend on completion of a transaction, are on constant standby to paper over all but the most egregious of perceived flaws.
In April 2017, according to sources close to the company, the country’s credit downgrading by two rating agencies proved to be too big a flaw to ignore. Merger talks, which had gone on for 10 long months, were abandoned. It is an indication of PepsiCo’s keenness to get a foothold in SA that those talks had survived so long during what was one of the most turbulent periods in our country’s history. Guptagate and details of state capture dominated the media, interspersed with details of president Jacob Zuma’s cabinet reshuffles.
Two years later — it’s impossible to know when the discussions resumed but, presumably, some months ago — and PepsiCo is ready to deal. While there has been considerable improvement in the political environment, it remains far from stable, and the economy has continued on its weaker trajectory. Hence the almost 40% discount on what Pioneer, the country’s second-largest food group, would have cost in 2017.
For many South Africans inured to grim headlines about political, and increasingly corporate, malfeasance, it seems puzzling that a foreigner might find us attractive. Some believe a bargain-basement price was the lure.
The reality is that behind the headlines there is a lot that works well in SA and the rest of Africa. And while the R23.5bn price tag makes this one of PepsiCo’s largest deals outside the US, it’s not much more than one week’s revenue for the third-largest food group in the world. Evidently a price worth paying for access to the long-promised African renaissance.
That the deal was announced just as the competition authorities gave the go-ahead for a consortium led by Tel Aviv-based Central Bottling to buy Clover, the country’s largest listed dairy manufacturer, sparks the euphoria of a double consecutive win by Bafana or the Springboks. How many more wealthy multinationals are waiting in the wings to snatch SA gems at the low point of the economic cycle?
The prospect of local investors in well-established businesses selling out to multinationals could be of some concern, even to those who embrace footloose global capitalism. It is essentially “replacement” investment and may not be the sort targeted by President Cyril Ramaphosa in his $100bn investment campaign. But to the extent that new leadership and improved access to resources and markets helps to grow these established SA businesses, it will provide the desired stimulus to economic development.
The next big challenge for PepsiCo will be getting the deal through the competition authorities. Hopefully it will be without a repetition of the sort of awkward politicking, led by then economic development minister Ebrahim Patel, that dragged out finalisation of Walmart’s acquisition of Massmart for almost two years.
While it’s absolutely crucial to protect national interests, this should be done in the structured manner allowed for in the Competition Act and not on the ad hoc opportunistic basis so far favoured by Patel. As minister of the merged and more powerful department of trade and industry, Patel might be more prepared to operate consistent with his president’s economic agenda.