PepsiCo Brings Bottlers Into Fold in $7.8 Billion Merger

By Bob Blandeburgo
Associate Editor
Money Morning

In what looks to be a windfall for investors, PepsiCo Inc. (NYSE: PEP) yesterday (Tuesday) finally made a takeover offer that The Pepsi Bottling Group Inc. (NYSE: PBG) and PepsiAmericas Inc. (NYSE: PAS) found to be acceptable.

Pepsi will merge with the two bottlers for $7.8 billion, representing a more than 20% increase over the initial $6 billion offer that PGB called "grossly inadequate" and PAS said was "not acceptable."

Under the terms of the deal, PBG shareholders have the option of taking $36.50 per share or 0.6432 shares of Pepsi. Owners of PAS will get $28.50 per share or 0.5022 Pepsi shares.

"The market was betting on mid-$30s price for Pepsi Bottling and a mid-to-high $20s price for PAS, so the final offer is actually at or slightly higher than expectations," an unnamed arbitrageur told Reuters. "PepsiCo had tried to argue the previous bids were 'full and fair' but now the offers are finally close to that."

The merger will give Pepsi, which makes the syrup in its soft drink products, 80% control of its North American beverage market and in the process save the company $300 million. It's expected to boost its earnings by about 15%.

When the merger is complete later this year or in early 2010, it will enable Pepsi to "move more nimbly," Oscar Gruss & Son Inc. analyst Louis Meyer told Bloomberg News in an interview. "They're fighting a lot of battles within the different product lines."

Pepsi spun off its bottling division 10 years ago to cut costs, resulting in the formation of PBG. Bringing PBG back into the fold will give Pepsi greater control over its soft-drink sales, prices and boost distribution of Gatorade sports drink.

"It will also make it easier to leverage 'Power of One' opportunities that involve both our beverage and food offerings, and for PepsiCo to present one face to retail customers," said Pepsi Chairwoman and Chief Executive Officer Indra Nooyi. Pepsi owns salty snack purveyor Frito-Lay North America, which accounts for 30% of Pepsi's business.

"Ten years ago this business was a simpler business. It was largely about carbonated soft drinks," John Sicher, editor of Beverage Digest told BBC News. "The changes in the beverage business are really what has necessitated this change, in Pepsi's view."

Before the announcement, PBG climbed 33% since April 17, the last trading day before Pepsi's initial offer. Shares of PAS rose 32% in the same period of time.

Governance of the merged company was not revealed.  However, the future of PBG Chairman and CEO Eric Foss is now in question following a June Bloomberg report that cited regulatory filings that said Foss would get at least a $16.5 million "golden parachute" should the Pepsi takeover succeed.

Stock prices of all three companies saw significant gains on the news. Shares in Pepsi closed at $59.06 up $2.86, or 5.09%. PBG shares were up $2.87, or 8.54% to close at $36.49 while PAS stock rose $2.35, or 8.99% to end at $28.50.

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