Call it dietary diversification: PepsiCo could be the next target for Kraft-Heinz after its failed takeover of Unilever, says CreditSights.

Half of Kraft-Heinz is owned by Warren Buffet and private equity firm 3G. Buffett says he drinks five Coca-Colas every day. (Not the diet kind, improbably.)

Now, some reports have speculated that AB-Inbev — the megabrewer created by 3G — could buy Coca-Cola, in which Buffett has a roughly 9 per cent stake. But as far as large targets go, though, Coca-Cola is pretty pricey. From the CreditSights note:

The numbers look much more doable at PEP… PEP has a lower multiple and operating margin than KO. The margin difference is due in part to the fact that KO operates as a pure-play beverage company, while PEP generates over 50% of its revenue from snacks.

A large share of revenues from food, you say? Hm, that sounds familiar… oh, right, about 40 per cent of Unilever’s revenues came from their packaged foods business.

Earlier this year, an analyst at Susquehanna guessed at a more complicated planned breakup of PepsiCo, which would send its snack business to Kraft-Heinz and its beverage business to InBev.

But the analysts at CreditSights think Kraft-Heinz will be the acquirer — in part because of the ambition signaled by the Braziliansapproach to Unilever. (Which, juuust in case you forgot, was broken by one Mr Bryce Elder.) From their note:

The UN bid in early 2017 admittedly caught us somewhat by surprise, given its size and the expansion into non-food categories. We believe the appetite demonstrated by the UN bid keeps the door open for much larger targets

A PEP sized deal brings the leverage conversation back to 5x as it is similarly sized as UN (PEP’s market cap of $163 bn is $4bn greater than UN’s).

More in the usual place.

Related links:
Reasons to read Alphaville, Unilever edition — FT Alphaville
The man who scuppered Unilever Kraft Heinz — FT Alphaville
3G’s Pepsi challenge — Bloomberg Gadfly
Why the hatchet men of 3G spent $10m on a better Oscar Meyer wiener — Bloomberg Businessweek

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