- The Washington Times - Monday, April 20, 2009

NEW YORK (AP) - PepsiCo Inc.’s $6 billion bid to buy its two largest bottlers should make the owner of the Gatorade, Naked juices and Aquafina brands more nimble in a landscape where soft drinks have declined in popularity in favor of healthier options like water and juices.

The deals for Pepsi Bottling Group and PepsiAmericas would let PepsiCo control about 80 percent of its total North American beverage volume _ something the company and analysts said would streamline the process of getting newer or smaller products to stores.

Consumers could see products such as Izze sparkling juice and Naked fruit juices at more places, Chief Financial Officer Richard Goodman said, since the company would be able to negotiate with retailers directly rather than persuading the bottlers that now control most distribution to include smaller products in their network.

“There is a need to be more nimble given the increasing role of (non-carbonated beverages), retailer consolidation and the changing competitive landscape,” PepsiCo Chairman and Chief Executive Indra Nooyi said.

The move shows how much the landscape has changed since 1999, when PepsiCo spun off Pepsi Bottling Group. At the time, the spinoff was a way for Pepsi to have a stake in a company that focused solely on making the soft drinks that dominated the market and were growing strongly.

Since then, though, soft drink sales have slowed, Pepsi added more non-carbonated beverages like Tropicana and Gatorade, and a different model is needed, Nooyi said.

“A move this big changes the entire landscape of the industry,” said John Sicher, editor of the trade publication Beverage Digest. “Today the beverage business consists of a greater diversity of products, and PepsiCo needs more control and flexibility over the route to market for its brands.”

Although ultimately the decision of what goes on store shelves lies with retailers, the move gives Pepsi more direction over its products by eliminating negotiations with independent bottlers and consolidating distribution.

The new system should improve the “speed of decision-making across the company and eliminate friction points resulting from competing manufacturing and distribution systems,” Nooyi said. She said new products that start out small in one system could be switched to another with little trouble.

Pepsi now has three beverage businesses: a bottler-distributed soft drink business, a warehouse-delivered sports drink business and a warehouse-delivered juice business, said Deutsche Bank North America analyst Marc Greenberg. Consolidating them offers Pepsi cost savings, control over pricing and a more competitive system than its rivals, Greenberg said.

However, it also gives the company a larger stake in the more volatile bottler business, which is affected by packaging and other costs.

PepsiCo, which had been trying to cut costs, expects the deals to boost earnings by 15 cents per share when the cost savings are fully realized and save $200 million per year before taxes. Analysts say the savings could even be as much as $400 million.

Goodman, the CFO, said job cuts are probable in the consolidation but did not give an estimate. PepsiCo has laid off 3,500 employees and closed six plants as part of an effort to cut $1.2 billion in costs by 2011.

PepsiCo said it still expects earnings and revenue in 2009 to grow in the mid- to high-single digit range, excluding the stronger dollar and any impact of proposed deal.

Analysts speculated that Coca-Cola Co., the world’s largest soft drink maker, may make similar moves with its bottlers since it faces the same challenges as Pepsi. It owns 35 percent of its largest bottler, Coca-Cola Enterprises Inc.

“We would expect Coke to follow,” said Greenberg. “But the longer it waits … the more it may cost: Advantage Pepsi.”

Coca-Cola declined to comment.

PepsiCo currently owns 33 percent of Somers, N.Y.-based Pepsi Bottling group and 43 percent of PepsiAmericas, which is based in Minneapolis. It offered cash and stock worth 17 percent more than each stock’s closing price on Friday for the stakes it doesn’t own.

That equates to $29.50 per for share for Pepsi Bottling Group and $23.27 per share for PepsiAmericas. Both are evaluating the offer.

Bottlers have been raising prices, restructuring and cutting expenses to cope with weaker sales volumes and higher raw material costs. Last year, Pepsi Bottling Group’s profit fell 70 percent, mainly due to a restructuring charge, as sales rose 2 percent. PepsiAmericas earnings rose 7 percent last year as revenue rose 10 percent.

PepsiCo Americas Beverages revenue fell 12 percent in the first quarter, as volume of carbonated soft drinks fell in the mid-single digit percentage range and sports drinks volume fell in the double-digit percentage range.

For the quarter that ended March 21, PepsiCo earned $1.14 billion, or 72 cents per share, down from $1.15 billion, or 70 cents per share, a year ago. That beat the 67 cents per share analysts were expecting.

Revenue slipped almost 1 percent to $8.26 billion. Excluding the stronger dollar’s effect on international results, net revenue grew 6 percent.

Shares in Purchase, N.Y.-based PepsiCo fell $2.27, or 4.4 percent, to close at $49.86. Pepsi Bottling Group shares jumped $5.53, or 21.9 percent, to $30.73, while PepsiAmericas shares rose $5.16, or 26 percent, to $25.04.

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