PepsiCo’s juicy private equity deal

This is an audio transcript of the FT News Briefing podcast episode: PepsiCo’s juicy private equity deal

Marc Filippino
Good morning from the Financial Times, today is Wednesday, August 4th, and this is your FT News Briefing.

Spain is calling on the EU to curb high electricity prices. And we’ll talk about why Russia’s ban from the Olympics doesn’t really feel much like punishment. Plus, PepsiCo is selling off some of its juice brands to private equity.

Kaye Wiggins
Private equity firms love nothing more than what they call like the corporate carve-out to sort of buy a unit of a company. They might be potentially good businesses that are just not doing as well as they could because they’re like overlooked.

Marc Filippino
I’m Marc Filippino and here’s the news you need to start your day.

Spain is asking the EU to back measures that would limit surging electricity prices. The bloc has been working to reduce carbon emissions. And in an interview with the FT, Spain’s deputy prime minister for the Environment, Teresa Ribera, suggested that high prices and charges could create a backlash against carbon-cutting initiatives. She said Spain was in the eye of the hurricane here. Prices across the continent are at record highs, so Ribera called on the EU to provide a price ceiling for electricity rather than having rates determined by the highest prices national grids are willing to pay. Spain also wants the EU to use existing legislation to restrain or push down soaring carbon trading prices. Spain’s electricity prices are one of the hottest political topics in the country at the moment. This week, prices reached a wholesale rate of more than a 100 euros for a megawatt hour.

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Russia is officially banned from competing at the Tokyo Olympics because of past doping offences, but if you’ve been watching the games, it might be hard to tell. Russian athletes are taking part and winning medals under a different name, the Russian Olympic Committee. The athletes aren’t allowed to use the national flag or the national anthem for their medal ceremonies. They have chosen instead to use Tchaikovsky’s First Piano Concerto when they do win medals. Murad Ahmed is in Tokyo covering the Olympics for the FT. He has the story behind the ban and why it doesn’t really feel like a ban.

Murad Ahmed
The way that the ban works was challenged by Russian authorities in international sports courts. And the interpretation of the ban comes from that challenge. And it basically bans the symbols of the state. The athletes are technically neutral athletes. I’ve been in stadiums where I’ve seen the Russians, when I’ve seen the Russian colours everywhere. And it doesn’t feel like very much of a ban at all.

Marc Filippino
Yeah, I mean, it seems pretty toothless, Murad. Are athletes from other countries upset about it?

Murad Ahmed
There was an American swimmer, Ryan Murphy. He got a silver medal behind a Russian Olympic Committee athlete, and he said he struggled with training for a race that he thought wouldn’t be clean. The Russian Olympic Committee, on its official Twitter account, launched the kind of extraordinary response to this which ended, and I’ll try and read out, “through the mouths of athletes offended by defeat, we will not console you. Forgive those who are weaker. God is their judge. And for us, an assistant . . . ”, I mean, it’s quite wild stuff. In response, there have been other athletes, such as the swimmer Lilly King, who’s consistently brought this up. But actually what you’re seeing is the very tepid end of a long-running saga between global sports bodies and Russia, which stem back to 2015 when revelations of systemic state-sponsored doping from Russia came out.

Marc Filippino
I gotta tell you, it doesn’t really feel like this is a great deterrent for doping. Do you think other athletes look at this ban and say, if that’s all that’s gonna happen to me, why shouldn’t I use illegal substances?

Murad Ahmed
Well, I think you’ve gotta separate out athletes from how nation states behave. I think doping is going to be an ongoing problem in sport, regardless of the particular discipline or the nation involved. There are doping scandals in every country. And if you watch the Olympic Games and think what you’re watching is a 100 per cent clean or even close to a 100 per cent clean, I think you’ve misunderstood and have not followed how sports has worked. The Russian system was a particularly egregious version of doping. And I think any nation that’s looking at creating that sort of system may be a bit encouraged. But I think you have to understand also that the Russian state had launched for many, many years a rearguard against what they see as the smears. And I think their unwillingness to ever accept responsibility for what happened has essentially won out in the end.

Marc Filippino
Murad Ahmed is the FT’s sports editor, he’s in Tokyo right now covering the Olympics.

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PepsiCo has agreed to sell its controlling stake in the Tropicana and Naked juice brands to a French private equity group. It’s part of the US drinks company’s focus on calorie-free products like SodaStream that it claims are better for the environment and have higher growth potential. Kaye Wiggins is the FT’s private capital correspondent and she joins me now to discuss the deal. Hi, Kaye.

Kaye Wiggins
Hi, Marc.

Marc Filippino
So PepsiCo is cutting its stake in a couple of very well-known fresh juice brands. How have these performed during the pandemic, Kaye?

Kaye Wiggins
So coronavirus has actually been relatively good for these brands, partly because people during the pandemic suddenly were very focused on that kind of immune systems and wanted to buy products that contained a lot more vitamin C, at least that’s according to the private equity partner who worked on the deal.

Marc Filippino
So given that there’s a consumer shift towards healthier products, why is PepsiCo letting these brands go? It seems a little counterintuitive.

Kaye Wiggins
Well, it does. That’s true. But it’s not totally clear that these fruit juices are health products. I mean, the people at the private equity firm who are buying them, you would even say that that kind of both on the right side and the wrong side of this sort of shift towards healthier products, because while they do contain vitamins and fibre, there’s also a lot of sugar in fruit juice. And actually that has been putting consumers off in recent years. We’ve seen the growth in these juice brands has been much slower than the growth in brands that are selling lower calorie products.

Marc Filippino
Mmm, so this private equity group that is paying over three billion dollars for the Tropicana and Naked juice brands, uh what will it do to maintain momentum for these products?

Kaye Wiggins
So PAI Partners has something of a kind of track record of working with these kind of giant consumer goods companies on their brands. In the past, they’ve done deals with Nestlé, for example, on a joint venture call for an area which sells ice creams. So they have some kind of history of doing deals like this. Their argument basically is that these brands have been a bit unloved within the giant machine that is Pepsi, and they can do a lot better if they spun out separately and owned by a company that’s just focusing on them. But at the moment, it’s not entirely clear what that’s going to mean in practice.

Marc Filippino
We should mention that PepsiCo isn’t completely letting go here. It’s retaining a minority stake. Ah, why is it doing that?

Kaye Wiggins
Yeah, it’s a really good question. And I asked that of the company’s chief financial officer, Hugh Johnston, and he basically pointed to PAI’s track record of working with Nestlé in the past and said, you know, maybe they’ll be able to bring in some new skills to running these companies. Maybe whatever happens, they’ll sell this company on a higher price in a few years time. And so PepsiCo, whilst getting out of the business, it still has the ability to benefit from that in the future if this private equity firm does manage to sell it at a higher valuation in the years to come.

Marc Filippino
Does PepsiCo’s move tell us something more broad about how companies who might have too many things going on at once are scaling back but still retaining their side bets through private equity? Or is that a bit of a reach?

Kaye Wiggins
No, that’s not a reach at all. Private equity firms love nothing more than what they call like the corporate carve-out to sort of buy a unit of a company. And you hear this argument all the time that within kind of some of the world’s huge conglomerates, they might be potentially good businesses that are just not doing as well as they could because they’re like overlooked. So, you know, constantly these big conglomerates will be being approached by private equity firms like PAI but lots of others as well, who’ll be knocking on the door saying, hey, I see that you’ve got these brands here that maybe don’t quite fit with your overall portfolio or that don’t seem like a priority to you. You know, maybe we can come in and take them off your hands and they’ll often do deals that would then enable the conglomerate, the big companies, to to keep some element of the stake in that business so that they can share some of the upside if they then do go on to sell them. So, yeah, it’s an opportunity that private equity firms are, like, very keen to exploit at the moment, especially because doing deals involving kind of listed companies where you would try and buy the whole company and take it private, you know, are becoming more difficult and more expensive. And share prices are going up all the time at the moment of, you know, so those deals can be getting a lot harder to do. So to actually approach a company and just say, well, we want to just carve out these brands that, you know, is a really attractive thing for for a private equity firm to want to do.

Marc Filippino
Kaye Wiggins is the FT’s private capital correspondent. Thanks again for your time, Kaye.

Kaye Wiggins
Thanks, Marc.

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Marc Filippino
Before we go, today marks one year since an enormous blast in Beirut left more than 200 people dead and thousands injured. Our Middle East correspondent Chloe Cornish has written a powerful analysis on the anniversary and what’s gone on in Lebanon since the explosion. You should really read it and we’ll have a link to it in our show notes.

You can read more on all of these stories at FT.com. This has been your daily FT News Briefing, make sure you check back tomorrow for the latest business news.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.