PepsiCo to buy bottlers in deals totaling $7.8B

PepsiCoPEP said Tuesday it is buying its two top bottlers for $7.8 billion in a bid to save money and get new products to market more quickly. The deals were sealed months after PepsiCo's first offers were rejected and 10 years after PepsiCo first spun off its largest bottler, Pepsi Bottling Group.

The company spun off its bottler a decade ago so it could concentrate more on the then-booming soft drink business. But in the years, consumers have gravitated toward healthier options like juices and teas, leaving soft drink sales to slump.

That's why the maker of Gatorade and Pepsi wants to own Pepsi Bottling PBG again, and along with it, PepsiAmericasPAS. The world's second-biggest drink maker said the deals will allow it to respond more quickly to the changing market, because consumers tastes are changing so fast. Controlling the bottlers means it can do that effectively, and it also means it can better control costs and more tightly manage its business.

"We believe we are taking a very important step to strategically reshape the North American beverage business," said PepsiCo CEO Indra Nooyi.

PepsiCo will pay $36.50 a share for the shares it does not own of Somers, N.Y.-based Pepsi Bottling Group and $28.50 a share for the shares it does not own of Minneapolis-based PepsiAmericas.

Both offers are half stock and half cash.

At the time of the Purchase, N.Y.-based company's initial $6 billion offers for the bottlers in April, it owned 33% of Pepsi Bottling Group and 43% of PepsiAmericas. The bottlers had rejected the offers, saying it undervalued them. Analysts said the deals would go through if PepsiCo boosted its offer.

PepsiCo believes that owning the bottlers will help it save about $300 million a year by 2012, up from original estimates of $200 million, which analysts said was too low.

Stifel Nicolaus analyst Mark Swartzberg told clients in a note he expected the deals to mean savings of $450 million.

The deals will allow PepsiCo to directly manage 80% of its drinks distribution in North America.

That will change the face of the North American beverage business because it gives PepsiCo so much control over its products, from their prices to their distribution, said John Sicher, editor of the trade publication Beverage Digest. Consumers should expect to see more new Pepsi products, much more quickly, he said.

Nooyi told investors controlling distribution means the company can better react to changing tastes by being quicker to market new products. This means PepsiCo can give new products more prominence on shelves, which otherwise wouldn't happen, she said.

Typically beverage companies like PepsiCo create and market their drinks and brands, but it is the bottlers who make the products and distribute them to retailers and other establishments.

By owning its bottlers, PepsiCo can control how products are distributed, even down to which shelves they're displayed on and how much they cost, Sicher said.

Market leader Coca-ColaKO, maker of Coke and Sprite, aims to make similar changes by reworking relationships with its bottlers, Sicher said.

The companies are reacting as consumers change their tastes, Sicher said. Last year, the volume of soft drinks sold in the U.S. fell 3%, though dollar sales rose 1% to $72.7 billion, according to Beverage Digest. PepsiCo's volume slid 4%, faster than rival Coca-Cola, and it finished the year with a market share of 30.8%, while Coca-Cola had 42.7%.

"Ten years ago this business was a simpler business. It was largely about carbonated soft drinks," he said. "The changes in the beverage business are really what has necessitated this change, in Pepsi's view."

Shareholders in the bottlers will have the option to take cash or shares of PepsiCo stock, as long as the cash payout for each set of shareholders does not exceed 50% of the total purchase price.

PepsiCo expects the deals to add to earnings 15 cents a share once the bottlers are fully integrated.

The deals are subject to regulatory approval, though Nooyi did not say when the company would file for approval.

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