Pepsi Buys Quaker in $13.4B Stock Deal

N E W  Y O R K, Dec. 4, 2000 -- PepsiCo. has agreed to acquire Quaker Oats, the maker of Cap’n Crunch cereal, Aunt Jemima pancake products and Gatorade, in a deal worth $13.4 billion in stock.

Adding the popular Gatorade to its fleet of non-carbonatedbeverages, which includes Aquafina water, Lipton teas and Tropicanajuices, will give PepsiCo control of the dominant brand in the $2.5billion sports drink category.

“This will be a truly outstanding combination,” Roger A.Enrico, PepsiCo chairman and chief executive officer, said in astatement. “Bringing together Quaker and PepsiCo creates a wealthof exciting growth opportunities.”

Management Changes

PepsiCo will offer 2.3 of its shares for each Quaker share underthe deal announced today. The boards of both companies approvedthe deal over the weekend, but it’s still subject to regulatoryapproval.

When the deal closes, Enrico said Steve Reinemund, PepsiCopresident and chief operating officer, will succeed him as chairmanand CEO. Chief financial officer Indra Nooyi will add the title ofpresident.

Morrison, Quaker chairman and CEO, will be a vice chairman ofthe combined company.

Under terms of the deal, Quaker Oats can back out if PepsiCo’sstock dips below $40 a share for a period of 10 random days in themonth before closing. Under this scenario, PepsiCo would have toincrease the share-exchange ratio in order to keep the deal alive.

Quenching a Long Thirst

At least two PepsiCo rivals had a similar thirst to acquireQuaker Oats: the board of Coca-Cola abandoned talks to buyQuaker for a reported $15.75 billion two weeks ago and French foodconglomerate Danone SA backed away from a possible bid.

In the end, PepsiCo beat out its competitors with an offer thatessentially mirrored the one rejected by Chicago-based Quakerroughly one month ago.

“Gatorade would do even better under PepsiCo than it has underQuaker Oats because of better marketing and distribution,” saidJohn Sicher, a veteran soft drink industry watcher who publishesBeverage Digest in New York.

The deal could raise antitrust concerns because of PepsiCo’sownership of All-Sport, a competing brand to Gatorade, albeit withmuch less market share. However, PepsiCo has agreed to get rid ofAll-Sport in order to keep the deal alive.

‘Good for Competition’

Tom Pirko, who heads the beverage consulting firm Bevmark inSanta Barbara, Calif., said a PepsiCo-owned Gatorade would actuallybe good for competition. Under PepsiCo, Gatorade would benefit froma vast distribution system and over time would spur demand for moreproducts in the sports drink category, he said.

Pirko said the acquisition of Quaker Oats, and Gatorade inparticular, would give PepsiCo a “huge psychological edge” in itscompetition with Atlanta-based Coca-Cola, the world’s leading softdrink manufacturer. “PepsiCo is building a formidable “package ofleading brands,” he said.

While picking up Gatorade was no doubt the primary thrust ofthis transaction for PepsiCo, analysts were quick to point out thatQuaker Oats’ food products, which include granola snack bars andrice cakes, nicely complement PepsiCo’s line of salty snacks.

“Quaker Oats’ grain-based snacks could show real growth withinthe Frito-Lay marketing and distribution system,” Sicher said.“PepsiCo’s Frito-Lay division is the nation’s leader in saltysnacks with brands such as Lay’s, Fritos and Doritos chips.

Quaker vast food business also includes such brands as Quakerand Life cereals, and Rice-A-Roni.

Coca-Cola abandoned its pursuit of Quaker Oats after the softdrink company’s board rejected a deal reportedly worth $15.75billion. Only hours after Coca Cola’s announcement, the French foodconglomerate Danone issued a statement that it may be interested inmaking a bid for Quaker Oats. But it also dropped out of therunning.

More than a Sports Drink

Gatorade began in the 1960s as a drink for thirsty athletes buthas become a mainstream beverage.

Beverage Digest estimated Gatorade accounted for 84.1 percent oftake-home sales of sports drinks in the first nine months of thisyear. Coke’s Powerade had 10.9 percent while PepsiCo’s All Sporthad 2.8 percent, Beverage Digest said.

PepsiCo’s Pepsi-Cola division is the nation’s second biggestsoft drink concern with brands like Pepsi, Diet Pepsi and MountainDew. Atlanta-based Coca-Cola is the soft drink leader.

PepsiCo has been moving to expand its non-carbonated drinkportfolio. It recently agreed to buy South Beach Beverage Co.,which makes herbally-enhanced juices and teas.

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