PepsiCo will buy carbonated drink-machine maker SodaStream for $3.2 billion as it battles Coca-Cola for an edge in the health-conscious beverage market.

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Founded in Britain in 1903, SodaStream was a coveted device in British kitchens in the 1970s and 80s, allowing people to create fizzy drinks by adding flavored syrups to carbonated tap water, but its popularity faded as bottled sodas became cheaper.

The Israel-based company now markets itself as a sparkling water maker to appeal to younger and more health- and environmentally-conscious consumers, who do not drink much soda.

SodaStream offices (Photo: Ittai Shickman)

“With sugary carbonates and juices struggling and no turnaround in sight, mitigating the losses through newer and healthier products will be essential for PepsiCo,” said Euromonitor International analyst Matthew Barry.

Euromonitor says bottled water sales saw 6.2 percent compound annual growth in the five years to 2017, while carbonated soft drinks sales were flat.

PepsiCo Chairman and CEO Indra Nooyi—who is stepping down from the CEO post in October—called the companies "an inspired match" since both companies aim to reduce waste and limit their environmental footprint.

SodaStream CEO Daniel Birnbaum said that the deal marked a "validation of our mission to bring healthy, convenient and environmentally friendly beverage solutions to consumers around the world."

PepsiCo will pay $144 per SodaStream share in cash, representing a 10.9 percent premium to Friday’s closing price of SodaStream’s US-listed stock and a 32 percent premium to its 30-day average. The New York-based group will fund the deal with cash on hand.

SodaStream’s US-listed shares were up 10.5 percent in pre-market trading.

PepsiCo said SodaStream complements its water business, which includes Aquafina and smaller brands Bubly and Lifewtr. The company is also experimenting with other non-bottled drinks, including Drinkfinity, which is sold in pods.

PepsiCo said the transaction, unanimously approved by the boards of both firms, was expected to close by January 2019. It said the purchase was another step in its bid to “promoting health and wellness through environmentally friendly, cost-effective and fun-to-use beverage solutions.”

The sale looks to inject another big tax payout to Israel following previous sales of Israeli companies such as the mobile navigation app Waze, which was acquired by Google for about $1 billion, and Mobileye, which produces technology for self-driving cars and was gobbled up by Intel last year for $15 billion.

Prime Minister Benjamin Netanyahu was delighted by news of the sale, saying "The recent major acquisitions of Israeli companies prove not only the technological capabilities that have been developed in Israel but the business capabilities as well. I welcome this huge deal that will enrich the state treasury and also the important decision to keep the company in Israel."

Threat or opportunity

Speculation about PepsiCo or Coca-Cola buying Sodastream has bubbled for years. The company had marketed itself as a more environmentally friendly alternative to mainstream bottled drinks and therefore a threat to the giant producers. But the notion of creating soft drinks at home has had limited success. Over the years, many users have used Sodastream only for making fizzy water, without the flavored syrups it sells.

Coca-Cola and Keurig Green Mountain forged a partnership in 2015 to market a counter-top cold-drinks machine, but pulled the plug the following year after it failed to take off.

Adam Epstein, co-founder of Teleios Capital, a top-10 SodaStream shareholder, said the company’s focus on its core product and disciplined approach had started to pay off in recent quarters with “a rapidly growing installed base of loyal users and transformational improvement in operating performance”.

He said the deal “represents an excellent outcome for all shareholders”.

SodaStream’s shares have jumped 85 percent this year after a 78 percent increase in 2017 and have moved to $130 from $16.31 at the end of 2015.

In second-quarter results issued earlier in August, SodaStream’s revenue grew 31 percent, driven by growth in Germany, France, Canada and the United States, while net profit rose nearly 82 percent.

PepsiCo said its global distribution network would help SodaStream expand further.

The company was acquired by Israel’s Soda-Club in 1998 before private equity group Fortissimo Capital bought a controlling stake in 2007. The company went public in 2010.

SodaStream faced calls for a boycott several years ago over a factory it had in the West Bank, despite employing many Palestinians. It has since closed that factory and relocated to a much larger facility in southern Israel.

PepsiCo was advised by Goldman Sachs and Centerview, while SodaStream was advised by Perella Weinberg Partners.