PepsiCo (PEP) announced on Tuesday that it has agreed to purchase its two largest bottlers - Pepsi Bottling (PBG) and PepsiAmericas (PAS) - for a combined $7.8 billion, bringing the bottlers back under the wing of the company that divested them 10 years ago.
According to the terms of the agreement, PepsiCo will acquire both companies in a 50/50 cash and stock deal, which values Pepsi Bottling at $36.50 a share and PepsiAmericas at $28.50 a share. The deal will give Pepsi about 80% of its North American beverage distribution market.
PepsiCo said the deal will also the company to further streamline its production and distribution business, in hopes to provide better pricing against its primary competitor Coca-Cola Co. (KO). The deal is subject to shareholder and regulatory approval
"While the existing model has served the system very well, it is clear that the changing dynamics of the North American liquid refreshment beverage business demand that we create a more flexible, efficient and competitive system," said PepsiCo CEO Indra Nooyi in a statement.
For approximately 10 years, both Coke and Pepsi had publicly-traded subsidiaries that provided the distribution and bottling of their respective iconic products. Coke's owns a stake in its largest bottler Coca-Cola Enterprises (CCE), while PepsiCo owns about 33% of Pepsi Bottling and about 43% of PepsiAmericas.
However, as commodity prices and bottling costs have risen in recent years, Pepsi said an integrated approach would be more appropriate instead of outsourcing the expensive product distribution and packaging.
Ultimately, the transaction positions the entire Pepsi system to continue to win in he marketplace," said Pepsi Bottling CEO Eric Foss in a statement.
PepsiCo originally offered to purchase both bottlers earlier this year for a combined total of $6 billion, which was rejected by both companies as being too low.
Pepsi said the deal is being financed through debt financing provided by Bank of America-Merrill Lynch (BAC) and Citigroup (C), who also provided financial advising on the deal for PepsiCo. Pepsi Bottling was advised by Morgan Stanley (MS) and PepsiAmericas was advised by Goldman Sachs (GS).
Disclosure I am long PEP shares.
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