Why PepsiCo just sold its Tropicana and Naked juice brands for $3.3 billion

PepsiCo’s (PEP) big sale of its Tropicana and Naked juice brands on Tuesday was in large part driven by a desire to better calibrate a vast portfolio of beverages to new consumer needs and improve the profit margins of them. 

That’s the good word from one of PepsiCo’s top executives who played a key role in shaping the transaction that surprised market goers before Tuesday’s opening bell. 

“We are focused on capital allocation and ensuring we are always optimizing our portfolio to get the best results. As we went through an exercise over the past 18 months or so, we came to the conclusion that given our orientation towards higher growth and improving our margins, Tropicana was probably less of a fit with the portfolio that it was before. So we made a decision that is probably made sense to move Tropicana elsewhere,” PepsiCo Vice Chairman and CFO Hugh Johnston said in an exclusive interview on Yahoo Finance Live.

And move it elsewhere PepsiCo did. 

PepsiCo announced it will sell Tropicana, Naked and other select juice brands to private equity firm PAI Partners. The company will net $3.3 billion in after-tax proceeds from the deal, and also retain a 39% stake in the newly formed joint venture. 

Johnston said the deal will help improve operating margins in PepsiCo’s closely watched North America beverage business.

The company purchased Tropicana in 1998 and Naked in 2006. Since then, juice sales have slowly decelerated as consumers seek out less sugary drink options. PepsiCo said sales for the juice brands tallied $3 billion in 2020 with below company average operating margins.

FILE - In this July 9, 2015, file photo, Pepsi bottles are on display for sale at a supermarket in Haverhill, Mass. PepsiCo Inc. reports earnings, Wednesday, Oct. 4, 2017. (AP Photo/Elise Amendola, File)

Pepsi bottles are on display for sale at a supermarket in Haverhill, Mass. (AP Photo/Elise Amendola, File)

In recent years, PepsiCo has focused more on zero sugar beverage options within its portfolio. To that end, PepsiCo purchased energy drink maker Rockstar for $3.85 billion in early 2020. In 2018, it purchased Sodastream for $3.2 billion. 

PepsiCo already has a good idea on how it will use the proceeds from the transaction. It plans to use a chunk of it for debt reduction among other corporate initiatives, Johnston said. 

Added Johnston on any other future portfolio changes, “Generally speaking we have been an acquirer. We have also re-franchised bottling businesses over time in international as well. We are constantly looking at how do we make this portfolio even better and even stronger so we can grow it faster.”

The Street appears to love the move — PepsiCo shares rose more than 1% in Tuesday’s session. 

“The deal, in our view, is a smart and bold move as Tropicana and Naked were dilutive to both the top and bottom lines, and is structured such that PepsiCo will retain in house the more profitable chilled direct-store-delivery (“DSD”) business in the US. In addition, it’s yet another example of CEO Ramon Laguarta’s willingness and ability to aggressively reshape the PepsiCo portfolio to drive incremental growth and profit,” said Guggenheim analyst Lauren Grandet in a note to clients.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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