PepsiCo has entered Europe's public bond market with a €1 billion ($1.12 billion) two-part deal, just one day after cutting its profit outlook due to mounting costs in North America. The bond deal is split between a three-year tranche and a nine-year tranche, each fixed at €500 million. According to NDTV, the initial pricing level for the shorter part is around 60 basis points above mid-swaps, while the longer slice of debt is being marketed at around 105 basis points. This debt raise comes as the company navigates a challenging environment in North America, where it lowered its earnings growth outlook citing weakness in both its beverage and snack businesses.
CEO Ramon Laguarta acknowledged that the company doesn't "feel good about the beverage business," adding that it is "putting all of the urgency of the business and the focus in improving our performance in soft drinks." As reported by NDTV, sales volumes of North American beverages have fallen 3% so far this year, with zero-sugar and flavored options performing better than full-sugar versions. The company now expects core constant currency earnings per share to grow between 1% and 2%, down from its previous forecast of growth at the low end of 4% to 6%. CFO Steve Schmitt noted that "In North America, we remain committed to improving growth and core operating margin, however, it is taking more time than we planned."
CEO Laguarta said PepsiCo would be seeking areas to cut costs while continuing to offer more products with protein and fiber, as well as those with simpler ingredients and different oils, including avocado oil. The company is expanding its range of high-protein products to tackle the GLP-1 threat and is now promising extra productivity savings. "Additional structural cost reduction actions are being identified and will be implemented in the coming months to help fund investments that aim to accelerate organic revenue growth and mitigate the impacts of rising input cost inflation," Laguarta stated. The company's international business continues to perform well, but North America weakness, where third-quarter volumes in food were flat and dipped 2% in beverages from a year ago, remains a persistent pain point.
PepsiCo's shares have declined nearly 14% this year through Wednesday's close, compared with a 14% increase in the S&P 500 Index, as reported by NDTV. The company's enterprise value—including debt—has fallen to around 10 times EBITDA, down sharply from 18 times in mid-2022. Meanwhile, its more focused rival, Coca-Cola, has pulled further ahead in market performance. According to Business Standard, analyst Nik Modi at RBC Capital Markets noted that "The beverage business continues to disappoint, and we expect PepsiCo will continue to be a source of share to both Coca-Cola and Keurig Dr Pepper." The valuation decline reflects investor concerns about the company's ability to adapt to changing consumer preferences and compete effectively in the evolving packaged-food landscape.
PepsiCo is turning to Europe for the second time this year, while staying away from its home market, according to data compiled by Bloomberg. The company's latest euro deal adds to a record boom in so-called reverse Yankee issuance, with Alphabet Inc., Danaher Corp. and Baker Hughes Co. among US borrowers helping push sales above €140 billion this year. This European bond strategy reflects the company's need for capital access amid challenging North American market conditions and provides access to favorable European financing terms.
