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Pepsi Pops Open New Strategy

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Company launches takeover bid for its own bottling groups.

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Ten years ago, PepsiCo (PEP) spun off its bottling division as investors sought to boost profits.

Pepsi Bottling Group's (PBG) IPO was one of the largest in NYSE history. Today, Pepsi Bottling accounts for about 40% of Pepsi's global volume and about 50% of Pepsi beverages sold in North America.

But declining sales of soft drinks have forced Pepsi to re-think its strategy. Pepsico has launched a takeover bid for Pepsi Bottling Group and PepsiAmericas (PAS), the Wall Street Journal reports.

PepsiCo is offering $29.50 a share in cash and stock for Pepsi Bottling, valuing the company at about $6.4 billion. It's also offering $23.27 a share for PepsiAmericas, valuing the company at about $2.9 billion.

The deal would allow PepsiCo to recast production and distribution, and cut costs. Apparently, incremental steps won't yield the needed savings, and management feels a complete shake-up is required.

Combining PepsiCo with the bottlers would give the company control of about 80% of its volume in North America. The deal could save as much as $200 million and boost earnings by $0.15 a share - if everything falls into place as planned.

PepsiCo now holds about 33% of PepsiBottling, based in Somers, NY, and about 40% of PepsiAmericas, based in Minneapolis.

Coca-Cola (KO) launched a publicly traded bottler in the late 1980s. The plan: Own up to 49% of the bottlers while keeping their assets off Coca-Cola's books. The system worked well for Coke, which established a network of bottlers worldwide. But by the late 1990s, the bottlers had taken on debt to expand into new sales territory and to buy new equipment.

Control of distribution appears to be a key concern for PepsiCo. Last year, Pepsi Bottling launched distribution of Crush - a product of Dr. Pepper Snapple Group (DPS) that outsells Pepsi's fruit-soda brands.

Pepsi reported first-quarter net income of $1.14 billion, or $0.72 a share, compared with $1.15 billion, or $0.70 for the same period a year ago. Analysts expected the company to earn $0.67 a share on revenue of $8.28 billion. However, there were 3.8% fewer shares outstanding for the last reporting period.

Clearly, Pepsi believes the business has changed in the last 10 years, as more consumers choose water and juice drinks over carbonated beverages. This calls for revamped production and distribution, and it appears PepsiCo is moving aggressively to keep up with changes in the market.
No positions in stocks mentioned.
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