PepsiCo plans to buy back two biggest bottlers for $6B to smooth distribution

PepsiCo Inc. offered $6 billion Monday to acquire its two largest bottlers in an effort to update the way it delivers its products.

A customer takes a bottle of Pepsi from a display.

A customer takes a bottle of Pepsi from a display.

NEW YORK — PepsiCo Inc. 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 one per cent drop in first-quarter profit.

PepsiCo — maker of its namesake soda along with other drinks such as Mountain Dew, Gatorade and Aquafina and snacks like Lay’s and Fritos — will handle about 80 per cent of its North American beverage volume if the deals for Pepsi Bottling Group and PepsiAmericas go through.

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.

“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-CEO Indra Nooyi stated.

“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.”

The move allows Pepsi more direction over its products, since it will not have to negotiate with bottlers about distribution. However, Pepsi will also be more exposed to the more volatile bottling business, which is affected by packaging and other costs.

Although ultimately the decision of what goes on store shelves lies with retailers, in the past Pepsi had to negotiate with bottlers, which controlled distribution.

“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.

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

Purchase, N.Y.-based PepsiCo offered cash and stock worth 17 per cent more than each stock’s closing price on Friday for the shares of the two bottlers it doesn’t already own.

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

Chief financial officer Richard Goodman 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.

PepsiCo has already laid off 3,500 people and closed six plants as part of an effort to cut $1.2 billion in costs by 2011.

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