PepsiCo Inc offered $6 billion to buy the remaining stakes in its two largest bottlers, Pepsi Bottling Group and PepsiAmericas Inc, as it seeks to secure more control of its distribution and cut costs.
The U.S. soft-drink maker's plan to consolidate its bottling system is a major departure from its earlier strategy and highlights changes such as the consolidation of retailers and the growth of noncarbonated drinks, which are made differently than carbonated sodas.
Strategically, this represents a major about-face for PepsiCo and the entire beverage industry, JPMorgan analyst John Faucher said, adding the offer was truly a shock.
The cash-and-stock deal would give PepsiCo direct control of 80 percent of its North America beverage distribution volume, which could be a competitive advantage in some markets against archrival Coca-Cola Co
It's about speed, agility and control, Sicher said. Pepsi would be able to make selling decisions about its drinks without having to discuss them with the bottlers, he said.
PepsiCo also reported a quarterly profit that topped Wall Street estimates, helped by better-than-anticipated trends in its Frito-Lay snack business and overseas.
The company's shares were down $2.11 or 4.05 percent at $50.02 on the New York Stock Exchange on Monday afternoon.
PREMIUM OF MORE THAN 17 PERCENT
Shares of Pepsi Bottling jumped 22 percent to $30.73 and PepsiAmericas rose 23 percent to $24.45. Shares of Coke's largest bottler, Coca-Cola Enterprises Inc
Pepsi said it would move forward only if both bottlers accept the bids. It also said it would not consider selling its existing stakes in the bottlers, erasing any opportunity for another suitor to step in. PepsiCo already owns 33 percent of Pepsi Bottling and 43 percent of PepsiAmericas, according to recent securities filings.
Nonetheless, Credit Suisse analyst Carlos Laboy said he expects the bottlers to ask for, and receive, as much as 10 percent more than the current bid. Even though PepsiCo said it does not expect any problems from antitrust regulators, Laboy said concerns should not be dismissed outright since the bottlers also sell drinks from PepsiCo competitors.
In an interview, PepsiCo Chief Financial Officer Richard Goodman called the current offer fair and declined to say if the company would raise it.
Pepsi's offers consist of $14.75 in cash plus 0.283 shares of PepsiCo common stock for each share of Pepsi Bottling, and $11.64 in cash plus 0.223 shares of PepsiCo for each share of PepsiAmericas.
It has become very clear to us that we need to reshape our North American business in a fundamentally different way, PepsiCo Chief Executive Indra Nooyi said during a conference call.
In the more mature market of today, she said, there is a need to be more nimble given the increasing role of (noncarbonated beverages), retailer consolidation, and the changing competitive landscape.
PepsiCo said the deal would lead to more than $200 million in annual pretax savings and add to its earnings by at least 15 cents a share once the savings are fully realized.
Goodman said he expects to realize more than half of the savings within the first 18 months of the deal's closing, with the balance shortly after that.
Faucher, who has an overweight rating on PepsiCo and rates the bottlers both neutral, said about $200 million in synergies seemed way too low.
Pepsi Bottling said it would evaluate PepsiCo's proposal. The bottler, which was spun off from PepsiCo in 1999, accounts for more than half of the Pepsi-Cola beverages sold in North America and about 40 percent sold worldwide.
PepsiAmericas, which bottles and sells about 19 percent of PepsiCo beverage volume, advised shareholders to take no action pending review of the proposal by its board.
RESULTS BEAT STREET
PepsiCo also reported better-than-expected quarterly results and affirmed its outlook for the year on Monday, a day before Coke is expected to report quarterly results.
PepsiCo's forecast, which calls for net revenue and core earnings per share to rise in a mid- to high-single-digit percentage range on a constant currency basis, did not include the impact of the proposed bids for the bottlers.
Goodman said the forecast assumes that the economy does not get particularly better or worse.
We're not assuming any great growth in the economy, either in the U.S. or outside the U.S., for the balance of the year, Goodman said. We're also not assuming a badly deteriorating situation either, but we're not being particularly optimistic.
Net income fell to $1.14 billion, or 72 cents per share, in the first quarter ended on March 21 from $1.15 billion, or 70 cents a share, a year earlier, when there were more shares outstanding. Excluding items, earnings were 71 cents per share, which topped analysts' average forecast of 67 cents, according to Reuters Estimates.
Net revenue fell 1 percent to $8.26 billion, as sales by volume also fell 1 percent.
PepsiCo's financial advisers for the deal were Centerview Partners, Banc of America Securities and Merrill Lynch.
(Additional reporting by David Jones in London; Editing by Lisa Von Ahn, Rupert Winchester and Matthew Lewis)