PepsiCo Bids $6 Billion for Bottlers; Profit Tops Views

PepsiCo offered $6 billion to buy the remaining stakes in its two largest bottlers, Pepsi Bottling Group and PepsiAmericas , as it seeks to cut costs and secure more control of its distribution.

The U.S. soft-drink maker's plan to consolidate its bottling system is a major departure from its earlier strategy and highlights changes in the beverage industry, such as the dominance of a few very large retailers and the growth of noncarbonated drinks, which are manufactured differently than carbonated sodas.

"Strategically, this represents a major about-face for PepsiCo and the entire beverage industry,'' said JPMorgan analyst John Faucher, who said the offer was "truly a shock.''

The cash-and-stock deal would give PepsiCo direct control of 80 percent of its North America beverage distribution volume, which could be a competitive advantage in some markets against archrival Coca-Cola , said John Sicher, editor and publisher of industry publication Beverage Digest.

"It's about speed, agility and control,'' Sicher said. Pepsi would be able to make selling decisions about its drinks without having to discuss them with the bottlers, he said.

PepsiCo also reported a quarterly profit that topped Wall Street estimates, helped by better-than-anticipated trends in its Frito-Lay snack business and overseas.

Premium of More than 17 Percent

PepsiCo said Monday it was offering $29.50 per share in cash and stock for Pepsi Bottling Group and $23.27 per share for PepsiAmericas, representing a 17.1 percent premium to both companies' closing stock prices on Friday. The deal values Pepsi Bottling at $6.49 billion and PepsiAmericas at $2.96 billion.

Photo: Rachel Haller Pepsi Plant

The offers consist of $14.75 in cash plus 0.283 shares of PepsiCo common stock for each share of Pepsi Bottling, and $11.64 in cash plus 0.223 shares of PepsiCo for each share of PepsiAmericas.

PepsiCo already owns about 33 percent of Pepsi Bottling and about 43 percent of PepsiAmericas, according to recent securities filings.

"It has become very clear to us that we need to reshape our North American business in a fundamentally different way,'' PepsiCo Chief Executive Indra Nooyi said during a conference call.

"In the more mature market of today,'' she said, "there is a need to be more nimble given the increasing role of (noncarbonated beverages), retailer consolidation, and the changing competitive landscape.''

PepsiCo said the deal would lead to more than $200 million in annual pretax savings and to add to its earnings by at least 15 cents a share once the savings are fully realized.

Faucher, who has an "overweight'' rating on PepsiCo and rates the bottlers both "neutral,'' said about $200 million in synergies seemed "way too low.''

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Pepsi Bottling said it would evaluate PepsiCo's proposal. The bottler, which was spun off from PepsiCo in 1999, accounts for more than half of the Pepsi-Cola beverages sold in North America and about 40 percent sold worldwide.

PepsiAmericas advised shareholders to take no action pending review of the proposal by its board. The company accounts for about 19 percent of all PepsiCo beverage products sold in the United States.

In some territories, PepsiAmericas sells and distributes products under brands licensed by companies other than PepsiCo. PepsiCo-related revenue accounted for about 80 percent of its total net sales in fiscal 2008.

Results Beat Street

PepsiCo also reported better-than-expected quarterly results and affirmed its outlook for the year.

The forecast, which calls for net revenue and core earnings per share to rise in a mid- to high-single-digit percentage range on a constant currency basis, did not include the impact of the proposed bids for the bottlers.

PepsiCo said net income fell to $1.14 billion, or 72 cents per share, in the first quarter ended on March 21 from $1.15 billion, or 70 cents a share, a year earlier, when there were more shares outstanding.

Excluding items, earnings were 71 cents per share, which topped analysts' average forecast of 67 cents, according to Reuters Estimates.

Net revenue fell 1 percent to $8.26 billion, as sales by volume also fell 1 percent.

PepsiCo's financial advisors for the deal were Centerview Partners, Bank of America and Merrill Lynch.

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