Gajrawala, Kaumil, beverage analyst with UBS Investment Bank, New York, said in a research note, "We expect [the new company] to be substantially more dominant in the U.S., as the company combines its distribution/manufacturing into one entity and drives profit growth through a 'one-portfolio' approach. While retailers are likely to be supportive of this deal, some appear concerned on how much PepsiCo will look to leverage their position, particularly in c-stores."
Stock analysts with Deutsche Bank, New York, said they expected Coca-Cola Co. to purchase its bottler, and perhaps this move by Pepsi will bring that closer to reality. "Things on the beverage chess board just got a little more complicated," said analyst Marc Greenberg in a research note. "For starters, the domestic company we felt most urgently needed to 'fix itself' by buying its bottler was Coke, not Pepsi. PEP's first move therefore very likely creates an advantage."
Meanwhile, analyst Mark Swartzberg of Stifel Nicolaus, New York, said the proposed deal "has raised a variety of questions, including risk to distribution of Dr Pepper Snapple's Crush brand by PBG and PAS. Early this year, PBG and PAS began distributing Crush, taking retail availabilityup from approximately 40% at the end of 2008 to nearly 100% at present."
PBG, Somers, N.Y., and PAS, Minneapolis, both confirmed that it received unsolicited, nonbinding proposals from PepsiCo, Inc. to acquire all the outstanding shares of the company's common stock not owned by PepsiCo. Each company said its boards will evaluate the proposal carefully and respond in due course.
If completed, the acquisitions would create a leaner, more agile business model and provide a stronger foundation for PepsiCo's future growth, the company said. Upon acquiring the outstanding shares of the two bottlers, PepsiCo would handle distribution of about 80% of its total North American beverage volume, including both its direct-store-delivery and warehouse systems.
PepsiCo Chairman and CEO Indra Nooyi said: "Our operating environment has evolved dramatically in the last decade. Retailers have continued to consolidate. New competitors have emerged. And noncarbonated drinks, which have different economics and different distribution systems than carbonated soft drinks, have become a much bigger factor in the industry and in our own portfolio. We believe that by reshaping our business model we can significantly improve our competitiveness and our growth prospects."
She added, "Consolidating the bottling businesses with our franchise company would create many benefits. We could unlock significant cost synergies, improve the speed of decision making and increase our strategic flexibility. We would be able to present a more unified face to our retail and foodservice customers, which would better position us to provide customized solutions, as we do at Frito-Lay, and to take to a new level our 'Power of One' program of bundled food and beverage offerings."
The consolidation would create annual pre-tax synergies estimated to be more than $200 million, relating primarily to reducing redundant costs, achieving greater scale efficiencies and realizing new revenue opportunities.
The consolidated business offers a range of additional potential benefits, including the ability to bring product and package innovation to market more quickly; more streamlined manufacturing and distribution systems; greater flexibility in how the company goes to market, by product and channel; improved national account coordination; and the ability to react quickly to technological advances.
PepsiCo's close working relationships with both bottlers has enabled the current system to function at a high level. "We have great respect for [PBG] and [PAS], which share our values and are both true operating companies," said Nooyi. "Based on our history of successful acquisitions and our strong operating culture, we have a high degree of confidence that we would deliver a seamless integration."
PepsiCo said it does not foresee issues obtaining the customary regulatory approvals and the proposed acquisition is not subject to a financing contingency. The proposals are subject to the completion of definitive merger agreements and limited confirmatory due diligence. The offers made for both PBG and PAS are cross-conditional based on the successful completion of both transactions.
PepsiCo is one of the world's largest food and beverage companies, with 2008 annual revenues of more than $43 billion. Its principal businesses include: Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. The PepsiCo portfolio includes 18 brands that generate $1 billion or more each in annual retail sales.
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