PepsiCo quenches thirst with Quaker Oats deal

PepsiCo quenches thirst with Quaker Oats deal

No. 2 soft drink maker to buy Gatorade parent for $13.4 billion in stock

December 4, 2000
Web posted at: 11:54 AM EST (1654 GMT)

NEW YORK (CNNfn) -- Soft drink maker PepsiCo said Monday it will purchase Quaker Oats for $13.4 billion in stock, ending a month long courtship to acquire the parent company of Gatorade, the dominant brand in the fast-growing U.S. sports drink category.

The merger ends a roller coaster odyssey for Quaker Oats, which at one point during the last month flirted with merging with Pepsi, Coca-Cola Co. and French food conglomerate Groupe Danone.

The agreement calls for Pepsi to swap 2.3 shares of its stock for each outstanding Quaker Oats share. Based on Pepsi's closing price of $42.38 Friday, that values the Chicago-based company at $97.47 per share, or $13.3 billion based on the 315 million new shares Pepsi said it will issue to Quaker Oats shareholders.

In addition, PepsiCo will assume about $761 million in Quaker debt, and will receive a breakup fee of $420 million if Quaker calls off the transaction to go with another partner, according to the Wall Street Journal interactive edition.

Pepsi expects the deal to close in the first half of 2001 and to add to earnings in the first full year.

"Combining with the world-renowned PepsiCo organization will unleash the tremendous global growth potential of the Gatorade brand and leverage the strengths of our foods business," Quaker Oats Chairman Robert Morrison said Monday.

The agreement occurred nearly a month after the two companies walked away from virtually the same proposal after Quaker Oats insisted on a price protection collar," which would protect its shareholders against a sudden decrease in Pepsi's stock price.

The companies said the deal they have cut does not have a collar. However, if Pepsi shares fall and take the value of the deal to Quaker investors below $92 per share, then Quaker can walk away from the deal without financial penalty. Pepsi's bid is capped at a valuation of $105 per Quaker Oats share.

As part of the transaction, Pepsi Chairman and CEO Roger Enrico plans to accelerate his previously announced departure and hand over both positions to company President Steve Reinemund when the transaction closes.

Enrico, who previously had said he would step down as chief executive at the end of 2001 and as chairman the following year, will remain as vice chairman of the board.

Morrison, Quaker Oats' well-regarded chairman and CEO, also will be a vice chairman of the combined company's board.

Analysts have maintained all along that adding Quaker Oats would represent a major coup for Pepsi, which is engaged in a pitched battle with chief rival Coke to build out their noncarbonated beverage portfolios.

Gatorade is by far the dominant brand in the $2.5 billion sports drink category, controlling nearly three-quarters of the take-home sales in that market.

Though Gatorade has been by far the fastest-growing product in Quaker Oats' broad portfolio, which also includes Captain Crunch cereal and Aunt Jemima syrup, and now represents roughly 40 percent of the company's overall sales, analysts have long theorized the sports drink could experience even greater growth when combined with a major distribution network such as Pepsi's.

"Gatorade would do even better under PepsiCo than it has under Quaker Oats because of better marketing and distribution," said John Sicher, a soft drink industry watcher who publishes Beverage Digest in New York.

Coke Chairman Douglass Daft nearly sealed a $15.75 billion merger agreement with Quaker Oats two weeks ago himself, only to watch his board quash the deal at the 11th hour, a move some analysts said may ultimately haunt the world's No. 1 soft drink company.

With Coke out of the picture and Danone's board declining to pursue a deal after its shareholders reacted harshly to its interest, Quaker Oats was left with little choice but to return to Pepsi's original offer, analysts said.

"I think (Quaker CEO Robert) Morrison did the best job he could for Quaker Oats shareholders," John McMillin, food industry analyst at Prudential Securities, said. "It took a while, but you can't blame him for courting Coca-Cola."

PepsiCo has been moving to expand its noncarbonated drink portfolio, which includes Aquafina water, Lipton teas and Tropicana juices. It recently agreed to buy South Beach Beverage Co., which makes herb-enhanced juices and teas.

The deal could raise antitrust concerns because of PepsiCo's ownership of All-Sport, a competing brand to Gatorade, albeit with a much smaller market share, estimated to be around 5 percent. PepsiCo likely would have to agree to divest of its All-Sport holdings as part of any agreement with federal regulators.

While picking up Gatorade was seen as the primary thrust of this transaction for PepsiCo, analysts have said that several of Quaker Oats' food products, including granola snack bars and rice cakes, will nicely complement PepsiCo's line of salty snacks.

"Quaker Oats' grain-based snacks could show real growth within the Frito-Lay marketing and distribution system," Sicher said. PepsiCo's Frito-Lay division is the nation's leader in salty snacks, with such brands as Lay's, Fritos and Doritos chips.

In light of the deal, Quaker said Monday it is discontinuing its $1 billion stock repurchase program announced in March 1998.

Source: http://www.cnn.com/2000/fyi/news/12/04/pepsi.purchase/

 

PepsiCo Guzzles Quaker Oats

Mergers are notoriously difficult, as Quaker Oats found out not long ago. How will Pepsi integrate Quaker into its line up? With few apparent financial problems, some strong synergies, and a couple of ex-Marines running things, this could be one of the most successful food mergers in recent memory.

By Bob Fredeen (TMF Bobdog)
December 11, 2000

So far, the merger of PepsiCo (NYSE: PEP) and Quaker Oats (NYSE: OAT) looks like a great deal for Pepsi. Mergers are notoriously difficult to accomplish, as Quaker discovered a few years ago with its purchase of Snapple Iced Teas. Problems can crop up in all sorts of areas -- on the balance sheets of the companies involved, in the new combinations of people in the workplace, or in the mechanics of integrating two companies with different products and distribution channels, just to name a few.

When looking at the financial statements for both companies, nothing extremely negative jumped out at me. Quaker's debt is not significant to Pepsi now, even without Quaker's cash reserves or other assets taken into account. Pepsi expects an increase in interest payments, but Quaker has generated over twice that amount of operating cash in just the last nine months.

Quaker's margins for the last nine months are pretty strong for a food and beverage company, with both businesses enjoying operating profit margins above 17%. Nabisco (NYSE: NA) was around 10% and Bestfood's (NYSE: BFO) operating profit margins were recently at 15%, for comparison. (Jeff Fischer took a look at consumer food and beverage makers in our new Industry Focus 2001.) Finances, then, are not the biggest worry for Pepsico investors.

The biggest historical problem for merging companies has been personnel and corporate culture issues. This is much harder to gauge from an investor's perspective, but there are several factors that bode well for Pepsi's ultimate success. Both companies have spent the last few years restructuring and refocusing on their core businesses. This could be beneficial, as employees of both companies have already been working in a fluid environment, so the merger won't be disturbing years of entrenched habits.

Part of this personnel problem has been the difficulty in getting people in the acquired company to work comfortably with their new bosses. There is no easy cure for this problem. Pepsi pointed out, however, that the entire Quaker team is coming over to Pepsi to run Quaker's businesses. These managers are the folks who have turned Quaker around in the last three years, and Pepsi wants to keep that expertise. Additionally, Pepsi will maintain many of the current salary and bonus strategies, which should make the employees of Quaker more comfortable with their new employer.

Among the people who have already agreed to stay with the merged entity is Quaker Chairman and CEO Robert Morrison, who will be co-vice chairman with current Pepsi Chairman and CEO Roger Enrico. Enrico will step down from his current posts once the merger is closed. After the deal closes, Pepsi will have some extremely talented and experienced people running the company, which bodes well for the merger's success.

The mechanics of integrating the two companies is another significant problem Pepsi will face. The company will need to combine bottling and distribution capacity, as well as revamp its selling channels. Two of the great strengths of the "new" Pepsi will be the number of top brands in its stable and improved distribution scale. Integrating the products into the distribution channel could be a complex task.

All of these points pale in comparison to one last problem that must be resolved. According to someone on the conference call, Bob Morrison's preferred soft drink comes in a distinctive red can originating from Atlanta, Georgia. Future CEO and former Marine Captain Steve Reinemund may have to pull rank on this former Marine.

The fact that I don't see any obvious merger-killing problems right now does not mean the problems aren't there. Once the deal closes, investors will need to watch Pepsi closely.

Watch grocery stores to see if Pepsi delivers on its new "power aisle" ideas and if it seems to be dominating the non-carbonated drink market. Watch the financial statements to see when some of the sales, profits, and cost-saving synergies begin to appear there. Finally, keep an eye on the news wires to watch for any managers leaving the new company. All of these areas will give investors clues as to the health of the new "new" Pepsi, and the success of the Pepsi-Quaker merger.

 

 

 

 

Awaiting FTC approval, Pepsi, Quaker spread widens

CHICAGO, June 20 (Reuters) - The widening spread between PepsiCo Inc. (NYSE:PEP - news) and its proposed acquisition target, Quaker Oats Co. (NYSE:OAT - news), has left investors and arbitrageurs wondering whether government regulators are moving to nix the deal or will require increased concessions from Pepsi.

At the close Wednesday, the spread between the price at which Quaker's stock was trading and the price offered seven months ago for Quaker by Pepsi in its $13.8-billion buyout deal widened to more than 10 percent, from 6.6 percent at the close Monday.

A widening spread can be an indication that investors are worrying about whether the deal will close. While most sources believe that the deal will not be killed, the longer the government delays, the more skittish investors get.

Shares of Chicago-based Quaker rose 44 cents to close at $90.99 on Wednesday on the New York Stock Exchange, while Pepsi's were up 35 cents to $44.06.

A mergers and acquisition attorney who advises arbitrage traders told clients that Federal Trade Commission staff members are preparing documentation to try to make a case against the merger, arbitrage traders and an investor, who declined to be identified, told Reuters.

The ``attorney believes staff members of the FTC have been preparing documents in order to block the transaction,'' said an arbitrage trader, who does not have positions in either stock.

Quaker representatives would not comment on progress of the deal. A spokesman for Purchase, New York-based Pepsi said that company has been in a ``constructive dialogue with the FTC on a daily basis.''

Pepsi said earlier this month that the deal will be delayed until the third quarter as talks with regulators continue. Shareholders of both companies approved the deal last month.

Despite the attorney's concerns, industry watchers said investors remain focused on the national sports drink market and whether other drink manufacturers will be able to compete with Gatorade, which already controls the U.S. market, after it has the backing of Pepsi.

Pepsi agreed to sell its All Sport brand sports drinks business, which controls less than 5 percent of the market, to Atlanta-based Monarch on May 1. By comparison, Powerade, made by No. 1 soft drink maker Coca-Cola Co. (NYSE:KO - news), controls about 15 percent of the market.

Source: http://biz.yahoo.com/rf/010620/n2016606.html

Why Pepsi Loves Pooling

By Craig Schneider    CFO.com    Apr 11, 2001

PepsiCo, Inc. is going to great lengths to satisfy its latest case of the munchies.

The snack food and soft drink maker said late Monday that it agreed to sell 13.2 million shares of its stock to ensure that its pending merger with The Quaker Oats Co. will qualify for the “pooling of interests” method for merger accounting.

Its offering, which is being underwritten by Merrill Lynch & Co., specifically satisfies the requirement that merging companies for a period before and after the transaction do not repurchase stock in excess of 10 percent of the number of shares that are being issued in the pooling.

But it is PepsiCo's timing more than the stock sale that has intrigued some experts. After all, "No one wants to have to issue 13.2 million shares into this (volatile stock) market," says Bob Willens, Lehman Brothers' tax and accounting analyst.

With FASB's elimination of pooling expected by June 30, why would PepsiCo go to such trouble? After all, the new rules for goodwill accounting under the purchase method are intended to have all the benefits of pooling, including asset divestiture and share buybacks, without the earnings dilution.

Is Pepsi signaling that pooling still better?

"I'm seeing people really straining to qualify for pooling treatment," Willens tells CFO.com. "It doesn't seem to be a fair trade off or an even trade off and people are scrambling to get the last bits of the pooling apple."

Why? Companies are still not sure which intangibles would have to be amortized in a purchase transaction. “It’s not so clear that if you did a purchase that a substantial portion might be allocated to goodwill,” Willens says. “A very large amount would be allocated to other intangibles that still may have to be amortized.”

He suspects that PepsiCo faced this uncertainty with Quaker’s intangible assets. The Gatorade brand and trademarks are likely not considered to have a determinable life and therefore do not need amortization, Willens says. But other Quaker assets, including customer lists and supplier relationships, may need to be separated from goodwill and amortized.

(CFO.com covered this very issue last month in an article entitled "FASB’s Goodwill Proposal Confounds Experts.")

Other pooling issues surfaced in the recent Johnson & Johnson and Alza deal announcement. M&A activity among pharmaceutical companies is expected to be hurt under FASB’s new rules because patents will need to be amortized under the purchase method.

If American International Group Inc. buys insurer American General, Willens suspects the pooling method will be used here as well. Why? Life insurance companies would have to amortize existing life insurance policies under the new purchase accounting rules.

In order to get pooling treatment, a company must initiate pooling by announcing the major terms of the deal, such as the exchange ratio, on or before June 30.

Senior financial executives at PepsiCo declined to give reasons for the pooling push. “We weighed all of our options and arrived at our decision that pooling made the most sense for us,” says a PepsiCo spokesman, without further comment.

Still, Willens says the PepsiCo offering, which is expected to close on April 16, sends a message of its own. “That’s a pretty strong testimony to the uncertainties here and how I think the new purchase accounting is not a substitute for pooling,” he says. “They are putting their money where their mouth is.”