UPDATE:PepsiCo's Bottler Bids May Spur Negotiations,Coke Moves
20 Abril 2009 - 2:42PM
Noticias Dow Jones
PepsiCo Inc.'s (PEP) $6 billion bid for two of its bottlers is
poised to have a far reaching effect across the U.S. beverage
industry, spurring more cost savings for Pepsi, prompting big
changes in distribution and raising the possibility of a similar
move by rival Coca-Cola Co. (KO).
More immediately, PepsiCo's bid could spark a round of
negotiations with the bottlers it is offering to buy if their
boards decide to push for a better deal. One arbitrage trader said
he bought the bottlers' stocks Monday morning in the hope there
would be a higher price coming along, especially since Pepsi's
offers were unsolicited.
PepsiCo said Monday it is offering $29.50 in cash and stock for
each share of Pepsi Bottling Group Inc. (PBG) and is making a
similar offer for PepsiAmericas Inc. (PAS) at $23.27. The stocks of
both bottlers soared Monday, hitting levels that were above the
implied acquisition price. Pepsi Bottling was recently up 23% to
$30.98 and PepsiAmericas recently added 25% to $24.87. Both
bottlers said they are reviewing the offers.
Shares of Coca-Cola Enterprises Inc. (CCE), Coke's largest
bottler, also rose nearly 8% in early trading and was recently up
2% to $15.18 as investors contemplated the possibility that Coke
might move in Pepsi's direction.
"If Pepsi is successful in dramatically changing its
go-to-market strategy in beverage, giving it a competitive
advantage both in execution and cost saves, Coke may have no choice
but to ultimately buy Coca-Cola Enterprises," said ConsumerEdge
Research analyst Bill Pecoriello.
Coke has recently worked with Coca-Cola Enterprises to set up a
joint organization to coordinate supply-chain activity. Coke -
which reports earnings Tuesday - declined to comment. Coke is also
seen as having some financial flexibility given that its $2.4
billion proposed deal for China Huiyuan Juice Group recently fell
through.
Pepsi's proposed deals took investors by surprise Monday and
Pepsi's shares were recently down 4% to $50.01, in line with the
broad stock market. Pecoriello said there may be some concerns that
Pepsi may have to offer more and worries about Pepsi executing the
consolidation. The deal would also expose Pepsi to the
slower-growth bottling business.
Pepsi's move marks a reversal of the steps that company took a
decade ago to separate its bottling operation. In 1999, the company
went through an initial public offering for a roughly 60% stake in
Pepsi Bottling. That spinoff was intended to placate investors and
to rid PepsiCo of a low-margin and capital-intensive business.
Bottlers, which are heavy users of commodities like aluminum and
are responsible for transporting the drinks, tend to have much
narrower margins than Coke and Pepsi, which sell the soft drink
concentrate and market the brands.
But in the last decade, the U.S. beverage industry has changed
dramatically, with non-carbonated drinks growing and sales of fizzy
sodas falling. The recession has put added pressure on sales of
non-alcoholic drinks. PepsiCo's earnings on Monday reflected some
of those pressures. The company's earnings exceeded expectations,
but at the PepsiCo Americas Beverages unit, volume fell 6%.
In North America, volume performance was hurt by declines in
carbonated soft drinks and sports drinks. On a constant currency
basis, net revenue at the Americas beverages business declined 9%
and core operating profit was down 10%. In a conference call after
its earnings report, PepsiCo acknowledged that its Gatorade sports
drink business had declined over the last year.
Pepsi's own business has evolved over the last decade, with the
company acquiring non-carbonated brands like Gatorade and
Tropicana, both of which aren't for the most part currently
distributed through the bottling system. Pepsi argues that with the
changes in the market, it needs to be more nimble in being able to
use bottler and other distribution systems as needed. Owning the
bottlers will allow for quicker distribution of new products and
speedier decision making, it says.
"Pepsi needs more control and flexibility on how it gets which
products to market and this will do that to them," said John
Sicher, editor of trade publication Beverage Digest.
With North America under added pressure during the recession,
all possible efforts to boost profits have come under the
microscope. "We've been seeing this [soft drink] business in North
America evolve. We've seen this profit pool remain flat and
sometimes even shrink," said Chief Executive Indra Nooyi on the
conference call. "And we've been thinking about every possible way
we can reconceptualize this system so that all of us can make a
healthy living in this business."
Pepsi currently owns a 33% stake in Pepsi Bottling and a 43%
stake in PepsiAmericas. It still has 110 independent bottlers in
the U.S. and could attempt to take over more of these businesses,
many of which are small privately held family operations. Small
bottlers can choose not to sell out since many of these businesses
have perpetual contracts to distribute Pepsi's products, said
Sicher.
Coke separated Coca-Cola Enterprises in the 1980s in a move that
rid Coke of debt on its balance sheet from buying up bottlers. More
recently, both Pepsi's and Coke's relationships with their bottlers
have been fractious on occasion. Coca-Cola Enterprises late last
year pointed to pressures it had felt from higher concentrate costs
from Coke. Trade publication Beverage Digest, citing sources, said
that moves by Pepsi Bottling and other bottlers to distribute some
non-Pepsi brands like Dr. Pepper Snapple Group Inc.'s (DPS) Crush
and Muscle Milk caused some consternation inside PepsiCo. It is
still unclear what the impact of Pepsi's deal will be on Dr. Pepper
Snapple. Stifel Nicolaus noted that the new Crush distribution
agreements are perpetual and don't appear to provide a way out for
a change of control.
Pepsi said its efforts at consolidation would create annual
pre-tax synergies of more than $200 million through cost reductions
and efficiencies of scale. Analysts said Monday that the estimate
appeared to be conservative and that Pepsi could see more cost
savings than its first estimate.
In an interview, PepsiCo Chief Financial Officer Richard Goodman
said the bottler deals would help the company in a variety of ways
by allowing a greater push for brands like Gatorade through the
bottling system.
It would also allow Pepsi to work better with retailers in its
offering of snacks and drinks, he said. Pepsi believes "the offer
we made is a very fair offer," Goodman said. "We didn't make it at
the bottom of the market." The deals are cross conditional,
implying that Pepsi will go ahead only if agreements are reached
with both bottlers.
Pepsi posted first-quarter net income of $1.14 billion, or 72
cents a share, compared with $1.15 billion, or 70 cents a share, a
year earlier. Revenue slipped 0.8% to $8.26 billion. Analysts
polled by Thomson Reuters expected earnings of 67 cents on revenue
of $8.28 billion.
-By Anjali Cordeiro, Dow Jones Newswires; 201-938-2408;
anjali.cordeiro@dowjones.com