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PepsiCo quenches thirst with Quaker Oats dealNo. 2 soft drink maker to buy Gatorade parent for $13.4 billion in stock
NEW YORK (CNNfn) -- Soft drink maker PepsiCo said Monday it will purchase Quaker Oats for $13.4 billion in stock, ending a monthlong 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. RELATED STORIES: Quaker shares jump on Pepsi talks rumors RELATED SITES: Pepsiworld | |||||||
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