Let the negotiations begin!

Pepsi Bottling Group rejected PepsiCo'soffer to buy the remaining stake in the bottler, saying the bid was "grossly inadequate."

The rejection was widely expected, but a deal still is likely to get done. The lingering question remains: at what price?

ConsumerEdge Research analyst Bill Pecoriello is making the argument that it will be a bit higher than many are currently expecting.

Late last month, Pepsi offered $29.50 for shares of Pepsi Bottling, its largest bottler, and $23.27 for PepsiAmericas, which has yet to comment on the offer.

PepsiCo's bid was priced at about a 17 percent premium over each company's closing share price on the day before the offers were made.

Since the bid became public, Pepsi Bottling shares have been trading at an average one-day premium of about 35.77 percent, according to FactSet Mergerstat. So that's a good indication of where arbitrage traders are betting the price will head.

Pecoriello says he expects the offer for PBG to fall closer to $38 a share, although an argument can be made for an offer of as much as $55 a share. (A base case offer for PAS is $28.)

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A bid of $38 implies a price that is 7.3 times PBG's enterprise value-to-EBITDA ratio.  At that level, PepsiCo would be paying a 51 percent premium to where PBG was trading the Friday before the original offer, and it would be rewarded for the strong earnings it posted in its latest quarter as well as get a premium that is competitive with other bottling company mergers.

In its letter rejecting the offer, Pepsi Bottling Group told PepsiCo CEO Indra Nooyi that the offer was opportunistic and too low, and failed to fully account for the cost savings that could be achieved by combining the two companies.

The cost savings are key since it is one of the main reasons PepsiCo is doing this deal.

Pecoriello estimates PepsiCo could reap savings of at least $600 million, and possibly as much as $800 million from combining the companies. A good chunk of that savings would likely be put back into PepsiCo business to strengthen the Gatorade franchise and develop new brands.

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