PepsiCo Inc. to Buy Bottling Companies for $7.8 Billion

By Jody Mitoma August 5, 2009, 1:12am
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PepsiCo Inc. has agreed to take control of its two biggest bottlers for $7.8 billion, half in shares, half in cash. The company will most likely now be bundling snacks and drinks.

[Bloomberg -->] PepsiCo will pay $36.50 a share for Pepsi Bottling Group Inc. and $28.50 a share for PepsiAmericas Inc., half in cash and half in stock, based on the July 31 closing price of PepsiCo, the companies said today in a statement. PepsiCo offered about $6 billion in April, a bid the bottlers rejected. PepsiCo shares rose 5.1 percent.

The takeovers give Purchase, New York-based PepsiCo control of about 80 percent of its North American beverage market, enabling Chief Executive Officer Indra Nooyi to garner about $300 million in cost savings and revenue, while simplifying negotiations with retailers such as Wal-Mart Stores Inc.

Owning the bottlers lets PepsiCo “move more nimbly,” Louis Meyer, an analyst with Oscar Gruss & Son Inc. in New York, said in a telephone interview. “They’re fighting a lot of battles within the different product lines.”

PepsiCo climbed $2.86 to $59.06 at 4 p.m. in New York Stock Exchange composite trading. Pepsi Bottling jumped 8.5 percent to $36.49 and PepsiAmericas added 9 percent to $28.50.

The company already owns about 33 percent of Somers, New York-based Pepsi Bottling and about 43 percent of Minneapolis- based PepsiAmericas.

Sparring Over Price

Since Nooyi, 53, made her bids in April, PepsiCo and Pepsi Bottling had sparred in public over price. PepsiCo sued the bottler and withheld votes from some directors at its annual meeting.

A pair of meetings between PepsiCo and Pepsi Bottling in mid-July failed to bring about a deal, said two people with knowledge of the talks. The breakthrough came on July 30, when Nooyi called Ira Hall, the head of the committee of Pepsi Bottling’s independent directors, one of the people said.

The two met at Nooyi’s home the following day and hashed out the basic terms of an agreement, the people said. Nooyi then reached an agreement with PepsiAmericas, and the companies’ boards approved the deals yesterday, one of the people said.

The combination is expected to add 15 cents to earnings by the time all savings are realized in 2012, the companies said. The deal should be completed late this year or early in 2010. PepsiCo received commitment letter for as much as $4 billion in debt financing for the transactions, according to a PepsiAmericas filing.

‘Redundant Cost’

“We can eliminate redundant cost between the various systems, including headquarters and back office,” Nooyi said on a conference call today. Chief Financial Officer Richard Goodman said the company would realize savings by cutting supply chain costs and “rationalizing” selling.

PepsiAmericas employed 20,800 at the end of fiscal 2008, according to a company filing. Pepsi Bottling had 66,800 workers.

The U.S. recession has trimmed sales in PepsiCo’s beverage business as Americans eschew Gatorade and soft drinks for cheaper alternatives. The company’s Americas’ drink volume fell 6 percent in the second quarter. Volume at the Americas Food unit, which includes Frito-Lay products, climbed 1 percent.

PepsiCo and bigger rival Coca-Cola Co. sell beverage concentrate and syrup to licensed bottlers, which add water and other ingredients, put the mixture in bottles and cans, and sell it. In 1999, PepsiCo followed Coca-Cola’s lead by spinning off its capital-intensive bottling operations to create Pepsi Bottling.

Cold-Fill

Soda and bottled water are produced on so-called cold-fill manufacturing lines because the products don’t require heat to guard against bacteria and other harmful organisms. PepsiCo makes its own sports drinks and juices, which require “hot- fill” manufacturing lines to increase shelf life.

Many PepsiCo-made drinks are sold to chain stores through a warehouse system. Bottlers deliver most of their products store by store. As non-carbonated drinks grew to 65 percent of the North American beverage market from 40 percent 10 years ago, PepsiCo found the split system more cumbersome to negotiate, executives have said.

Goodman has said PepsiCo wants the kind of flexibility it has with its Frito-Lay snacks unit, which both makes and distributes its products. Also, instead of splitting a smaller pie with Pepsi Bottling and PepsiAmericas, PepsiCo can consolidate the earnings for its shareholders.

PepsiCo got advice on the transaction from Centerview Partners, Bank of America Corp., Citigroup Inc. and Davis Polk & Wardwell. Pepsi Bottling was advised by Morgan Stanley, Perella Weinberg Partners and Cravath, Swaine & Moore LLP. PepsiAmericas used Goldman Sachs Group Inc., Briggs & Morgan P.A. and Sullivan & Cromwell LLP. [<-- Bloomberg]