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February 1, 2018

The Sparkling Water Revolution

MHT Partners  | Consumer Investment Bank

Sparkling water is one of the hottest consumer products in years. Among changing consumer preferences, new market entrants, private equity investments, and strategic acquisitions, sparkling water has the makings of a craft beer-type revolution. Americans, once heavy soda drinkers, have been looking to reduce sugar, calorie, and artificial sweetener intake. Enter a sugar free, calorie free, flavored sparkling water, which when consumed, has many of the desired taste features of a traditional soda. According to Nielsen, the sparkling water category has doubled over the past 4 years, growing from $961 million in the 52 weeks ending June 1, 2013 to $1.8 billion in the 52 weeks ending May 27, 2017.

One of the largest contributors of that growth is La Croix, a subsidiary of National Beverage Corp. (Nasdaq: FIZZ), which is arguably the most recognizable brand in the sparking water industry today. Sold in pastel-colored cans and available in a wide variety of flavors, it seems everywhere you look, from office and home refrigerators to end-cap displays in grocery stores, you see La Croix. The brand has developed a loyal cult following thanks to a social media strategy specifically targeting millennials looking to immerse themselves in the latest on-trend craze. National Beverage Corp. has seen tremendous growth through the first half of its fiscal year 2018 as revenues grew 20% to $504 million, operating profit increased $27 million, and net income increased 35%. La Croix is clearly one of the leading drivers of their tremendous success. Interestingly enough, La Croix has been in the market for over 30 years, but sales significantly increased in 2010, largely attributed to changing consumer preferences and more health-conscious decision making.

Speaking of soda, the largest soda-production company in the world has entered the sparkling water movement. In October 2017, Coca-Cola North America announced the acquisition of the rapidly growing, Mexico-based Topo Chico premium sparkling mineral water for an estimated $220 million. Coca-Cola, through its Venturing and Emerging Brands unit, is in the business of identifying, acquiring, and growing smaller, high-value brands, and they believe Topo Chico, and sparkling water in general, to be the next big thing.

Not surprisingly, private equity investors are also focusing on the sparkling drink enterprise. VMG Partners, a San Francisco based private equity firm, invested in Spindrift, America’s first and only sparkling water made with real, squeezed fruit, in May 2017. Spindrift, as of May 2017, has seen more than 800% growth in revenue over the past 24 months.

SodaStream (Nasdaq: SODA), another notable brand name in the category, manufactures and distributes home beverage carbonation systems, and is gaining significant momentum in the industry. In November, SodaStream announced it was launching its premier flavor essences, Fruit Drops, and sold out online in just two weeks. The company’s shares were up approximately 75% in 2017 and they continue to beat earnings estimates.

Sparkling water, once considered mainly a mix for cocktails, is now an everyday beverage for many Americans. We look forward to continuing to see the evolution of the category and subsequent transactions in food and beverage M&A.

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