October 15, 2009 / 8:53 PM / 10 years ago

Pepsi, Bud cooperation a gateway to more deals

NEW YORK (Reuters) - PepsiCo Inc PEP.N and Anheuser-Busch agreed to share the tab on buying goods and services in the United States, but how much further could a fruitful partnership take them?

Industry experts say the procurement agreement at the least is a creative way for the two beverage giants to cut costs when it is difficult to expand sales, and could well be followed by a deeper collaboration.

A major success could even raise the prospect of a merger between the two, or prod rival Coca-Cola Co (KO.N) to seek its own acquisition in a countermove, experts said.

“It’s like getting the benefits of a merger without the merger,” said Harry Schuhmacher, editor of Beer Business Daily. “It will be interesting to see how these two companies ... will work together, and whether this is the first baby step toward an eventual full-on merger.”

Pepsi and Anheuser, the U.S. business of Belgium’s Anheuser-Busch InBev (ABI.BR), said earlier this week they would jointly purchase goods and services not directly related to making drinks, like office supplies and travel.

The move came after Pepsi Chief Executive Indra Nooyi cautioned investors that a new “age of thrift” among U.S. and European consumers would last well into 2010.

InBev already bottled Pepsi drinks in Brazil before its 2008 purchase of Anheuser-Busch, which created the world’s largest brewer. PepsiCo is in the process of closing its $7.8 billion acquisition of Pepsi Bottling Group Inc PBG.N and PepsiAmericas Inc PAS.N.

Anheuser-Busch InBev’s U.S.-listed shares rose 4.2 percent after news of the collaboration, fueled in part by what Edward Jones analyst Jack Russo called market speculation that the deal could set the stage for an eventual takeover by Pepsi.

Despite growing chatter in recent months about consolidation in the beverage industry, including that between alcoholic and nonalcoholic drink makers, Russo cautioned against reading too much into the Pepsi/Anheuser deal.

“I wouldn’t look for anything right away and I just don’t know at the end of the day if it makes a heck of a lot of sense, just because there seems to be some untapped growth potential in (emerging) markets,” Russo said, noting a growing middle class is increasingly able to buy beer and soft drinks.

“On the other hand, Wall Street is talking about these sorts of things,” he said.

MIXING DRINKS

Earlier this month, Mexico’s FEMSA FMSAUBD.MX (FMX.N), which makes Dos Equis beer and bottles Coke drinks, said it was in talks about selling its beer business. A source told Reuters at the time that FEMSA had spoken to brewers SABMiller Plc SAB.L and Heineken NV (HEIN.AS) [ID:nN01288456].

Credit Suisse analyst Carlos Laboy has since questioned whether Coke might consider bidding for FEMSA and then flip it to SABMiller for an equity stake in SABMiller as AB InBev and PepsiCo move closer.

“News that ABI and PepsiCo will pursue joint purchasing in the U.S. should give Coke another reason to pause and ponder the wisdom of distancing the (Coke) system further from beer,” Laboy said in a research note on Wednesday, referring to Coke’s century-old legacy of bottling just soft drinks.

SABMiller is “Coke’s best hope for standing toe-to-toe with Anheuser-Busch InBev over the long term,” Laboy added.

Coke declined to comment.

BUYING IN BULK

Stifel Nicolaus analyst Mark Swartzberg said PepsiCo and Anheuser could eventually share avenues of distribution, but he did not expect the deal to boost Pepsi earnings immediately.

“We do consider it a medium-term positive in itself and believe the new relationship suggests increased optionality for PepsiCo in its U.S. snacks and soft drinks business,” he said.

Morningstar analyst Phil Gorham said the deal made sense from a cost-savings perspective and could eventually extend to commodities like water and aluminum.

“If they can buy in bulk ... they might be able to get an advantage on price,” Gorham said.

AB InBev and PepsiCo said specific cost-savings would depend on the negotiated terms for each purchase. But the scope of their spending shows ample possibilities for savings.

In the most recent quarter, Pepsi’s selling, general and administrative expenses were $3.65 billion, while AB InBev spent $2.49 billion on administrative, sales and marketing and distribution expenses.

AB InBev has a reputation for being extremely thrifty and cost-conscious, said Russo from Edward Jones, who works in St. Louis where the brewer’s U.S. headquarters are.

“Maybe this is more of a benefit to Pepsi because AB InBev is known for being super lean and mean in these areas,” he said.

PepsiCo spokesman Dick Detwiler said the procurement deal is part of PepsiCo’s ongoing effort to improve productivity.

“It is not related to the bottling transaction and it does not depend on the bottling transaction,” Detwiler said. AB InBev declined to elaborate beyond a statement on Tuesday.

Reporting by Martinne Geller; Editing by Michele Gershberg, Bernard Orr

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