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Hong Kong. Shares of Tingyi (Cayman Islands) Holding, a Chinese noodle and beverage maker, rose as much as 14 percent on Monday, following a complex tie-up between the company and PepsiCo.

The deal, detailed on Friday, allows Tingyi and Pepsi to jointly tap China’s beverage market through an existing joint venture with Japan’s Asahi Group Holdings.

The three-way link up was hardly a standard acquisition or joint venture announcement, leaving some to wonder what exactly Pepsi was getting out of the deal, aside from a mere 5 percent stake. Bankers and analysts familiar with the transaction said on Monday that the deal is a clear positive for Pepsi, as it would allow the US company, which has been losing money in China, to access Tingyi’s vast distribution network.

They also commented that the partnership has its challenges, involving three companies from different parts of the world needing to operate efficiently.

Tingyi shares hit a two-month high of 23.80 Hong Kong dollars on Monday before closing up 9/4 percent at 22.75 Hong Kong dollars. Tingyi was suspended from trading in Hong Kong on Nov. 4. The shares had gained 4.5 percent this year through Nov. 3.

“We believe the strategic alliance with PepsiCo is neutral to positive for Tingyi,” RBS said in a note, adding that the deal should strengthen Tingyi’s market position, enrich its product mix and increase its bargaining power with distributors and suppliers.

Tingyi announced on Friday that it would buy PepsiCo’s bottling business in China in a strategic alliance with the US firm. In return, PepsiCo will receive a 5 percent indirect stake in Tingyi-Asahi Beverages Holdings (TAB), which Tingyi said on Monday will be listed in the future.

Tingyi-Asahi — a venture between Tingyi, Tokyo-based Asahi and Ting Hsin (Cayman Islands) Holding — sells tea, bottled water and juices and will become PepsiCo’s franchise bottler in China under the alliance. It will also make, sell and distribute PepsiCo’s carbonated soft drink and Gatorade brands, according to a statement from the US company.

Although Tingyi faces the immediate challenge of turning around and integrating PepsiCo’s China businesses, it would gain from PepsiCo’s technology and expertise in the carbonated drinks sector to which Tingyi has little exposure, analysts said.

Tingyi would also gain from being able to co-brand its juice products under the Tropicana brand, analysts said.

“This is a good deal for Tingyi and helps it expand into the broader beverages category,” Jessie Guo, a Hong Kong-based analyst at Jefferies Group, said. “Tingyi will be an even stronger competitor against Coca-Cola.”

Guo rates the Chinese company “hold” and plans to review the rating on the PepsiCo deal, she said.

TAB dominates China’s ready-to-drink beverage segment with around 55 percent market share, thanks to rapid growth since its establishment in 2004. PepsiCo had been losing money in China partly because it did not have a strong joint venture partner and had suffered from limited access to national distribution networks, which is key to success in China’s food and beverage market.

Under the deal announced on Friday, PepsiCo will initially receive 5 percent of TAB, with the option to increase its stake to 20 percent by 2015, when China is projected to become the world’s largest market for bottled drinks. The exercise price of the option is initially based on a $15 billion valuation, Tingyi said.

PepsiCo appeared to get the short end of the stick with Tingyi through the deal as its China bottling business, which has a book value of $600 million, is being swapped with only 5 percent of TAB, a stake Tingyi and PepsiCo say valued at about $55 million.

But analysts said PepsiCo would be worse off in a few years time if it chose to continue to run its China business on its own. Its China business would only lose more money and hence more value in the absence of a big Chinese partner.

PepsiCo’s bottling business in China has lost money for the past two years amid soaring raw materials costs and intense competition from Coca-Cola, whose share of the Chinese market is more than triple that of PepsiCo. PepsiCo’s China bottling unit incurred after-tax loss of $175.6 million in 2010 alone.

Whether PepsiCo could achieve its goal through TAB by working together with Tingyi and Asahi remains to be seen.

Tingyi’s chairman, Wei Ing-Chou, told reporters on Monday that Tingyi is considering listing TAB, but it was only a long-term plan.

Tingyi, controlled by Taiwanese billionaire Wei Ing-chou, produces and distributes instant noodles, drinks and baked goods. Its profit rose 16 percent to $229 million in the six months ended June 30 as instant noodles sales gained 22 percent. The company competes with Want Want China Holdings in China.

Reuters, Bloomberg