How SodaStream went from bubbles to splash with $3.2 billion PepsiCo deal

Targeting health-conscious and green-leaning consumers with messages whipping US beverage giants like Coca-Cola and PepsiCo Inc. for their use of plastic bottles is what helped Israel’s SodaStream grow from a simple maker of fizzy water into a behemoth worth $3.2 billion, as the acquisition deal with US beverage and food maker PepsiCo Inc. has valued the firm.

On Monday, PepsiCo signed a deal to acquire the home seltzer machine company for $3.2 billion in cash.

Just as Intel Corp. said about Israel’s Mobileye, which it acquired last year, SodaStream will remain an independent unit within PepsiCo, with its headquarters in Israel and maintaining its own brand.

The deal will allow the Israeli firm to have “access to resources we may not have had until today,” the company’s CEO Daniel Birnbaum said in an interview on Monday. But it will also ensure the company keeps its young heart.

“A lot of the big corporates realize that if they try to integrate acquisitions, especially entrepreneurial acquisitions, or startups, into the corporation, you basically kill them, you destroy the spirit. The heart,” he said.

“We are not a startup,” he added. But “we have a mentality of a startup.”

Set up in 1903 by Guy Hugh Gilby in the UK, the firm originally sold its aerating water devices to the British upper classes and royal household, gradually expanding its operations globally. It was acquired in 1998 by Israel’s Soda-Club, founded in 1991 by Peter Wiseburgh, who from the late 70s was the sole distributor of SodaStream products in Israel. He also patented a new brand of at-home carbonated machines, and distributed them globally. But popularity of the product waned as bottled sodas sold by international giants became cheaper.

Even so, after the acquisition, SodaStream became the world’s largest home carbonation system. Financial difficulties, however, led to the sale of the firm in 2007 by Israeli private equity investment group, Fortissimo Capital Fund, which appointed Daniel Birnbaum as the CEO. In 2010 the company listed shares on the Nasdaq and in 2016 on the Tel Aviv Stock Exchange.

Under Birnbaum’s leadership the company rebranded itself as a fizzy water company, a brash David providing a healthier alternative to the drinks offered by its Goliath competitors, which in addition to using massive amounts of sugar also  sell their products in planet-killing plastic bottles. SodaStream makes machines that carbonate home tap water in reusable bottles.

“One SodaStream reusable bottle rids the world of up to 3,000 single-use plastic bottles,” the firm says on its website. And its bubbles make water a “fun and exciting drink” so consumers drink more water as opposed to sweetened beverages, the website says.

In campaigns that made a splash, the firm used known personalities like Scarlett Johansson, Paris Hilton, Mayim Bialik and “Game of Thrones” personalities, including the psychopathic giant Gregor “The Mountain” Clegane, chiding the beverage giants for the mountains of plastic they are creating in the world and extolling the virtues of SodaStream’s bubbly water.

For the second quarter of the year, the company said revenue jumped 31 percent to $171 million, and net income increased by almost 82%. The company said it expects full year revenue to increase some 23% over that of a year earlier.

The price of SodaStream shares traded on the Nasdaq have surged 149% in the past 12 months, some 10 percent of that on Monday, after the deal was signed.

The $3.2 billion acquisition announced Monday is a bid by PepsiCo to contend with falling demand for sugar-laden soft drinks and greater consciousness of the environment: rather than beat ’em, PepsiCo joined ’em, teaming up with its critic-competitor.

PepsiCo and Sodastream had been in a relationship for years, holding a product launch at one point, said Birnbaum in the interview. And press reports said that PepsiCo had considered buying the company a few years ago.

Ramon Laguarta, the incoming CEO of PepsiCo, said at a press conference held Monday in Tel Aviv after the signing of the deal, that PepsiCo had been eyeing the company for a while, but “when you do a deal of this magnitude you want to make sure this is a proven model,” he said. “Since they changed their strategy to reposition their business as more water forward and they are now ready with a solid model, it has a lot of tailwind,” and it has been proven both financially and “with a solid brand and innovation strategy.”

In an interview with Fortune in 2017, PepsiCo’s outgoing CEO, Indra Nooyi, who initiated the SodaStream deal by calling Birnbaum some six weeks ago and then meeting him in London, talked about managing the company in one of the most disruptive periods of her tenure at the company, of which she took the helm in 2006.

“The industry is seeing a pace of change and disruption that we’ve never seen” she said in the interview. “You can look at it with pessimism, that, ‘Oh, my God, all of this is changing,’ or optimism, to say perhaps this is the time to rewrite some of the rules and rebalance the competitive equation in the industry. I’m in the latter camp, and I’m looking at the world and saying, ‘Interesting times.’”

Giving a hint as to why PepsiCo would look for such a deal with SodaStream, she said in the interview, “When a disrupter comes in, don’t look at it as, here’s someone who’s going to kill your business. Think of how they’re going to aid your business.”

Indeed, at the press conference, PepsiCo’s Laguarta said the US firm was looking to start a “water at the center” strategy, one in which consumers can create personalized solutions for their drinks at home.

“If I look at the future, there is going to be growth in consumers trying to make their own drink, trying to personalize how much carbonation, more or less, which flavor, more or less flavor. That is going to grow,” he said. There is also going to be an “important movement toward zero waste, so consumers are going to move away from the use of plastic and they are going to try to recycle as much a possible, reuse as much as possible. So those are spaces where I think the consumer will go.”

“That is why this is so strategic for us,” he said, referring to the acquisition. “This is a very strategic opportunity for PepsiCo.”

The acquisition will not mean PepsiCo will do away with plastic bottles, he said, even if the company is making its bottles fully recyclable and adopting more sustainable policies.

PepsiCo’s strategy going forward is “not an either-or-strategy. It is an and-strategy,” he said, in which PepsiCo will pursue cutting back on plastic waste —  a process that will take years — while also moving into spaces like that of SodaStream, “where a plastic will not be used only once, but many times.”

Birnbaum, for his part, said at the press conference that he does not plan to stop criticizing the giants for their use of plastics.

“PepsiCo management, Indra Nooyi, made it clear to me that they are acquiring SodaStream because of who we are and not because of who we are not,” he said. “And their intention is that we continue to disrupt the beverage industry and provide an alternative solution to the consumer.”

“We are staying the course at SodaStream, in Israel and overseas, and our marketing will continue to be disruptive. I give a lot of credit to the management of PepsiCo for having the courage and the determination and wisdom to recognize that that is what the consumer needs at this time. There is a changing world out there. Single-use plastic should stop, and gradually will. And we are part of that transformation together with PepsiCo.”

Birnbaum also sees himself as a force for change in the Israeli society by employing diverse populations in SodaStream’s manufacturing efforts, including Jews, Arab, Bedouins and Palestinians.

SodaStream became a target of the pro-Palestinian campaign over the location of its factory in the West Bank, before moving to a location inside the Green Line several years ago.

In October 2014, the firm announced it would close its West Bank factory in Maale Adumim and move to southern Israel, a relocation the BDS movement claimed was a result of its pressure. Some 500 Palestinian employees lost their jobs at that time. Israel gave the remaining 74 employees permission to enter the country and continue to work for SodaStream.

The BDS movement asserted that SodaStream discriminated against Palestinian workers and paid some less than Israeli workers. SodaStream said the opposite — that it provided work for hundreds of Palestinians on the same terms as Israelis.

In addition, American actress Scarlett Johansson came under fire by the BDS movement regarding her role as the first-ever brand ambassador of the Israeli company, which included appearing in an ad screened during the 2014 Super Bowl.

Johansson rejected the criticism, and described the firm as “building a bridge to peace between Israel and Palestine.”

For many years Pepsi Cola, as the company was then known, itself boycotted Israel, and its products could not be found locally, following pressure from the Arab world. The US company finally entered the Israeli market in 1991, when the Arab boycott waned.

At the press conference, referring to Birnbaum’s criticism of the beverage companies’ plastic policies, Laguarta said PepsiCo would allow SodaStream to “continue” to maintain that position.

“Companies need to disrupt themselves or be disrupted by somebody else. We plan to let SodaStream continue with its position, be proud of what they are and what they stand for, and at the same time they will try to make the non-SodaStream part of our business, which is very large,” become more sustainable.

“We are not going to stop all of the marketing practices of SodaStream,” he said.

Which means, that despite the acquisition, the battle of the bubbles will continue.