- The Washington Times - Monday, April 20, 2009

NEW YORK (AP) - PepsiCo Inc., the maker of drinks like Mountain Dew and its namesake soda, offered $6 billion Monday to acquire its two largest bottlers in an effort to update the way it delivers its products. It also reported a 1 percent drop in first-quarter profit.

The company, which makes Gatorade, Aquafina and snacks like Lay’s and Fritos chips, will handle about 80 percent of its total North American beverage volume if the deals for Pepsi Bottling Group and PepsiAmericas go through.

“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. Since then, soft drink sales have dropped and Pepsi bought Tropicana, Gatorade and other non-carbonated beverages.

“A move this big changes the entire landscape of the industry,” said John Sicher, editor of the trade publication Beverage Digest. “The spinoff happened in a day when the business was mainly carbonated soft drinks. 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.”

In short, the move allows Pepsi more direction over its products, since it will not have to negotiate with bottlers about what items are distributed. However, Pepsi will have a larger stake in the more volatile bottler business, which is affected by packaging and other costs.

“PepsiCo will now be able to decide how many varieties of smaller non-carbonated products go through the distribution system and eventually end up on retailer shelves,” Sicher said.

Although ultimately the decision of what goes on store shelves lies with the retailers, in the past Pepsi had to negotiate with bottlers, which controlled distribution, and persuade them to include smaller offerings in their network.

“We can now incubate new products that start out small in one distribution system and switch it to another with little friction,” Nooyi said.

Analysts speculated that Coca-Cola Co., the world’s largest soft drink maker, may follow suit since it faces the same challenges as Pepsi.

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

Coca-Cola declined to comment.

Shares in PepsiCo fell $2.07, or 4 percent, to $50.05 in midday trading. Pepsi Bottling Group shares jumped $5.25, or 21 percent, to $30.45, while PepsiAmericas shares rose $4.36, or nearly 22 percent, to $24.24. In contrast, most of the rest of the market sank, with the Dow Jones Industrial average down more than 200 points.

PepsiCo expects the deal to help earnings by 15 cents per share annually and save $200 per year before taxes. Analysts say that number is conservative and the savings could be as much as $400 million.

Purchase, N.Y.-based PepsiCo offered cash and stock worth 17 percent more than each stock’s closing price on Friday for the shares of the two bottlers it doesn’t already own. That equates to $29.50 per for share for the Pepsi Bottling Group and $23.27 per share for PepsiAmericas. Both bottlers are evaluating the offer.

PepsiCo currently owns 33 percent of Somers, N.Y.-based Pepsi Bottling group and 43 percent of PepsiAmericas, which is based in Minneapolis.

Chief Financial Officer Richard Goodman did not give a timeline for changes since the deal has not gone through. But he said ultimately the restructuring will mean consumers will be able to find more of the company’s smaller drink offerings in more places, such as its Naked fruit juices as well as Izze carbonated beverages, which have no artificial ingredients.

He added that layoffs are probable in the consolidation but did not have any estimate. The company had already been trying to cut costs as it deals with sagging soda sales and the poor economy. 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.

Demand for carbonated beverages have fallen steadily as healthier options like water and juice have become more popular. According to Beverage Digest, per capita consumption of soft drinks in 2008 dropped to levels not seen since 1992.

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. Analysts polled by Thomson Reuters, on average, expected a profit of 67 cents per share.

Revenue slipped almost 1 percent to $8.26 billion from $8.33 billion last year. Analysts expected sales of $8.28 billion. Excluding the stronger dollar’s adverse effect on international results, net revenue grew 6 percent, the company said.

The company said it still expects earnings and revenue in 2009 to grow in the mid- to high-single digit range, excluding the stronger dollar.

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