Months after its first offers were rejected, PepsiCo Inc. said Tuesday it plans to buy its two biggest bottlers, Pepsi Bottling Group and PepsiAmericas, in deals worth a total of $7.8 billion.
The world's second-biggest drink maker said Tuesday the deals will allow it to respond more quickly to a changing market as consumers seek out healthier options like juices and teas, rather than soft drinks. It will also allow the company, whose soft drink sales have been slipping, to control costs and more tightly manage its business.
PepsiCo, which makes brands like Pepsi and Gatorade, will pay $36.50 per share for the shares it does not own of Somers, N.Y.-based Pepsi Bottling Group and $28.50 per share for the shares it does not own of Minneapolis-based PepsiAmericas.
Both offers are half stock and half cash.
At the time of PepsiCo's initial $6 billion offers for the companies in April, it owned 33 percent of Pepsi Bottling Group and 43 percent of PepsiAmericas. The bottlers had rejected the offer, saying it undervalued them. Analysts had said the deals would go through if PepsiCo boosted its offer.
Shares of the two bottlers set 52-week highs on the news Tuesday morning. By midmorning shares of Pepsi Bottling were up $2.79, or 8.3 percent, to $36.41, while shares of PepsiAmericas rose $2.28, or 8.7 percent, to $28.43. Shares of PepsiCo rose $3, or 5.3 percent, to $59.20.
Purchase, N.Y.-based PepsiCo Inc. 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 had said was too low.
Reshaping beverage business
The deals also allow PepsiCo to directly manage 80 percent of its drinks distribution in North America, which PepsiCo said is key as it deals with consumers who are increasingly spurning soft drinks for health reasons and to save money.
PepsiCo CEO Indra Nooyi said on a conference call that controlling that much distribution means the company can better react to consumers' changing tastes by being quicker to market with new products.
She also said this means PepsiCo can give new products more prominence on shelves, which otherwise wouldn't happen.
"We believe we are taking a very important step to strategically reshape the North American beverage business," she said.
This move will change 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.
Typically beverage companies like PepsiCo create and market their brands, but it is the bottlers who make the products and distribute them to retailers and other establishments.
By owning its bottlers, PepsiCo can streamline that process so it controls how products are distributed, even down to which shelves they're displayed on and how much they cost, Sicher said.
Market leader Coca-Cola Co., maker of Coke and Sprite, aims to make similar changes, Sicher said, but it is trying to do that by reworking relationships with its bottlers.
Consumers will see a difference, too, Sicher said.
"Over time consumers should see more new Pepsi products more quickly and more broadly distributed," he said.
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 percent of the total purchase price.
PepsiCo expects the deals to add to earnings 15 cents per share once the bottlers are fully integrated.
Pepsi Bottling is based in Somers, N.Y., and PepsiAmericas in Minneapolis.
The deals are subject to regulatory approval, though Nooyi did not say when the company would file for approval.