UPDATE 4-PepsiCo to buy bottlers for $7.8 bln; shares up

Tue Aug 4, 2009 4:02pm EDT

* PepsiCo to pay $7.8 bln, up from $6 bln initial bid

* PepsiCo ups savings target to $300 mln/yr from $200 mln

* PepsiCo sees deal adding 15 cents/shr to earns by 2012

* Bottlers' shares up more than 8 pct, PepsiCo up 5 pct (Adds more analyst comment)

By Martinne Geller

NEW YORK, Aug 4 (Reuters) - PepsiCo Inc (PEP.N) agreed to buy bottlers Pepsi Bottling Group Inc PBG.N and PepsiAmericas Inc PAS.N in a sweetened $7.8 billion deal, after a decade of operating as separate companies, as it seeks to cut costs and boost profits in North America.

The second-largest soft drink maker said on Tuesday it will pay $36.50 per share for Pepsi Bottling and $28.50 per share for PepsiAmericas, representing premiums of about 45 percent and 43 percent from the bottlers' closing prices the day before Pepsi launched unsolicited bids in April.

Pepsi first offered $29.50 per share for Pepsi Bottling and $23.27 per share for PepsiAmericas. Those bids, at 17 percent premiums, were worth $6 billion.

The price increase was expected since the bottlers posted better-than-expected profits, said JP Morgan analyst John Faucher. Price increases and lower costs helped offset weak demand for pricier beverages because of the recession.

Still, each bottler's shares jumped to new year-highs and were up more than 8 percent in afternoon trading, with PepsiCo up 5 percent at $59.00.

"We think getting the deal done removes a big overhang on PepsiCo," Faucher said in a research note.

The takeout price for Pepsi Bottling, the much larger bottler, is about 16 times estimated earnings, in line with the stock's average multiple over the last 10 years, said Jim Tierney, analyst and portfolio manager at W.P. Stewart, which owns Pepsi shares among its $1.5 billion in assets.

"I don't think in any way they're overpaying for this," Tierney said. "Nor do I think it's a tremendous deal."

STRATEGY

Buying the bottlers will consolidate 80 percent of Pepsi's North American beverage volume, which Pepsi said will speed decision-making and eliminate friction between the companies.

PepsiCo, whose drink brands include Mountain Dew, Tropicana and Gatorade, is the bottlers' largest shareholder and largest supplier -- a relationship that sometimes puts their interests at odds, especially when it comes to the price of the beverage concentrate they buy from PepsiCo.

Tierney said the deal aligns the companies' interests so they can focus on improving performance in North America, where sales have sagged industrywide as consumers cut back amid expanding waistlines and shrinking budgets.

"You now have one entity focused on one thing -- selling more soda, selling more water, selling more tea, selling more Gatorade," Tierney said. "That's really what's key here."

Pepsi spun off the bottlers in 1999, following a similar move from top rival Coca-Cola Co (KO.N).

It is buying them back because the current model makes it difficult to achieve sustainable long-term profit growth since there is not enough profit in total to support investment in separate companies, Chief Executive Indra Nooyi said.

Coca-Cola, which has a decentralized system, declined to comment on the deal or Nooyi's assertion. Last month, Coke CEO Muhtar Kent reiterated his commitment to its model.

SAVINGS

The deal, expected to close late this year or early next year, should produce annual savings of $300 million by 2012, Pepsi said. That is above the $200 million it had expected.

Analysts and the bottlers thought that number conservative. Stifel Nicolaus analyst Mark Swartzberg estimates savings of $450 million.

Once those savings are realized, Pepsi said the deal should add about 15 cents per share to its full-year earnings. While Pepsi will incur one-time costs of about $300 million, the deal should add modestly to profit in 2010.

Although PepsiCo and Pepsi Bottling sparred over PepsiCo's initial bid, the ice apparently thawed after Nooyi met Pepsi Bottling director Ira Hall in person, a source familiar with the matter said.

Pepsi Bottling Chief Executive Eric Foss said Pepsi Bottling employees should benefit from greater career opportunities while shareholders will benefit from the deal's cash-and-stock structure, which lets them "participate in the significant upside we see in the combination."

Under the deal's terms, the bottlers' shareholders have the option to choose all cash or all stock, as long as Pepsi pays half cash and half stock in total.

PepsiCo said it will take on about $4 billion of additional debt because of the deal, but is committed to dividends and buying back shares.

Nooyi declined to say what management changes would result from the deal, leaving unspoken the fates of bottling executives Foss and PepsiAmericas CEO Bob Pohlad.

Pepsi Bottling shares jumped $2.74 to $36.36, while PepsiAmericas rose $2.28 to $28.43. (Additional reporting by Jessica Hall in Philadelphia; editing by John Wallace and Maureen Bavdek)

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