PepsiCo (PEP) finalized a deal last week to swap its 24 bottling operations in China for a 5% stake in Tingyi-Asahi, with options for up to 20%.

Under the agreement, Tingyi-Asahi will become PepsiCo's franchise bottler in China for carbonated soft drinks and Gatorade. The two may also co-brand some products under the Tropicana label. This will help give Pepsi an edge over rival Coca-Cola (KO) in the Chinese market.

Tingyi-Asahi, a maker of bottled water, tea and juices, is the beverage subsidiary of Tingyi Holdings, a leading Chinese producer of noodles, baked goods, and beverages.

Chinese beverage market

Pepsi is currently No. 4 in the Chinese market with a 5.5% share. Perennial rival Coca-Cola is the leader, with 16.8% of the market, followed by Tingyi at 14.4% and Hangzhou Wahaha Group at 7.2%, according to a Bloomberg article citing research by Euromonitor International.

Pepsi plans to invest $2.5 billion in China over the next three years, compared with Coca-Cola's planned $4 billion investment. The companies expect heavy competition in the world's fastest-growing beverage market, where they have both enjoyed double-digit growth.

Pepsi in China

By divesting itself of the bottling operations, Pepsi is streamlining and concentrating on its core beverage product. The bottling operations led to an after-tax loss of $45 million in 2009 and $176 million in 2010.

Furthermore, the alliance with Tingyi will increase Pepsi's bottling and distribution capabilities within China, thereby allowing deeper market penetration more quickly. The Tingyi-Asahi stock and options included in the deal have the potential to increase Pepsi's bottom line with minimal effort. The deal is currently valued at $257 million, according to current market prices.

Though the Trefis analysis reveals that Pepsi itself only constitutes 6.5% of the PepsiCo Stock price, the combined sales of all the drink divisions account for 48.4% of the price allowing for a much larger impact from the Tingyi deal.

As the size of the U.S. soft drink market shrinks and Pepsi's share of the market declines, the soda maker must find other ways to increase sales of its namesake product.

Trefis currently values PepsiCo at $71.30, a 14% premium over the current market price.

This article was submitted as part of our Trefis Contributors program and may not reflect the views of Trefis analysts.