Pepsi seeks control of its 2 largest bottlers in $6 billion deal

A profit squeeze in the $90 billion North America beverage business pushed Pepsi pepto offer $6 billion to retake ownership of its two biggest bottlers.

Pepsi wants the revenue generated by Pepsi Bottling Group pbg and PepsiAmericas, pasfrom which it spun off majority stakes 10 years ago, to offset the decline in consumption and rising costs. Volume for the biggest brands is down, and its plants are designed for a few big-volume brands.

"Something needs to be done to get things in better shape," says John Faucher, JPMorgan beverage analyst. "Pepsi is saying ... 'Let's go out and get some long-term profits.' "

PepsiCo, which owns 33% of PBG and 43% of PAS, on Monday offered a 17% premium in cash and stock of $29.50 a share for the rest of PBG and $23.27 a share for PAS. The PBG per-share offer is $14.75 cash and 0.283 shares of PepsiCo common stock. For PAS, it's $11.64 in cash and 0.223 shares. Pepsi said it will only do the deal if both companies agree. The two said the offers are being evaluated by their boards.

In 2008, overall soft drink volume fell 2%, while carbonated soft drinks fell 3%, Beverage Digest reports. Non-carbonated products are about 40% of Pepsi-Cola volume, vs. less than 15% 10 years ago.

But even growth in non-carbonated products that propped up volume for years, such as bottled water and sports drinks, has slowed.

Growing now, but not enough to take up the slack, are waters fortified with health additives, juices and low-calorie versions of sports drinks, such as Gatorade's G2.

Full control of the bottlers "will be a great enabler for the transformation of our portfolio for health and wellness products," says Massimo d'Amore, CEO of PepsiCo Americas Beverages. "Most of the health and wellness products are non-carbonated beverages and require a different structure that is more flexible with a different route to market."

That's because those brands tend to be smaller, and hundreds exist today that didn't exist 10 years ago. "In many cases, bottlers are not optimally equipped to handle smaller-volume, slower-moving" products, says John Sicher, editor and publisher of Beverage Digest.

These two bottlers make and distribute nearly 75% of Pepsi drinks in the U.S., excluding Gatorade.

Former PepsiCo chairman Steve Reinemund, currently a dean of business management at Wake Forest University and still a Pepsi shareholder, says the move "makes a ton of sense, and strategically, it's a bold and very insightful way to address the marketplace challenges. ... In a slower-growth environment in an industry that needs to be revitalized, using the same business model won't get you results."

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