DEALWATCH: PepsiCo's Bid For Bottlers Could Spur Rival Deals
23 April 2009 - 1:20AM
Dow Jones News
PepsiCo Inc.'s (PEP) decision this week to take full control of
its two main bottlers could push other U.S. beverage companies,
like Coca-Cola Co. (KO) and Dr Pepper Snapple Group Inc. (DPS), to
seek out similar acquisition strategies.
By acquiring companies that bottle its beverages, PepsiCo gains
greater flexibility, control and a faster reaction time when it
comes to introducing and revamping new and existing products.
However, the deal has negative implications for both its small
and large rivals. Case in point is Dr Pepper Snapple Group, which
has been tapping Pepsi Bottling Group's (PBG) infrastructure to
drive growth of its products such as Crush soda.
The agreement between Dr Pepper and Pepsi Bottling, which was
struck in August 2008, instantly doubled Crush's market penetration
while increasing competition for Pepsi's own fruity drink
offerings. But this arrangement could be at risk now that PepsiCo
is acquiring the bottler, and that could prompt Dr Pepper to look
for alternative sources of distribution in the markets served by
Pepsi Bottling. Now that PepsiCo can directly control who has
access to its distribution infrastructure, it also gains added
negotiating leverage when it comes to future acquisitions of
smaller rivals.
The trend to control distribution via acquisition of bottlers
was started by Dr Pepper with its 2006 acquisition of Dr
Pepper/Seven Up Bottling Group. Following that deal, Dr Pepper
acquired several other bottling assets that gave it direct
distribution control of more than half of its U.S. volume.
PepsiCo is likely to gain similar control by acquiring its top
two bottlers, since the two, along with smaller rival Pepsi
Bottling Ventures Group, account for more than 60% of PepsiCo's
North American volume. That would leave Coca-Cola as the only
remaining beverage giant not in direct control of its distribution,
putting it at a potential disadvantage versus its competitors.
PepsiCo's bid represents a marked departure from an earlier
strategy by PepsiCo and Coca-Cola when the soft-drink makers spun
off their bottling plants to become asset-light and focus solely on
selling their high-margin concentrates.
Since then, however, the non-alcoholic beverage market has
experienced a shift in consumer preferences from carbonated to
newer, alternative beverages, like energy drinks. The success of
smaller, nimbler companies such as Red Bull and Hansen Natural
Corp. (HANS), maker of Monster-brand drinks, in introducing these
new products has also served to increase the strategic importance
of controlling distribution assets. Gone are the days when
carbonated products from Pepsi and Coke dominated consumer
mind-sets and, hence, marginalized the roles of the
distributors.
Given the enhanced strategic importance of these assets, the
market may bid up the share prices of bottling companies.
Shares of both Pepsi Bottling Group and PepsiAmericas Inc. (PAS)
are trading slightly above the prices offered by PepsiCo, implying
investors are hopeful of higher bids. Shares of Coca-Cola
Enterprises Inc. (CCE) jumped nearly 3% Monday on speculation that
Coca-Cola may have to react.
Coca-Cola has subsequently said it likes the current franchise
model with respect to its bottling system; however, if PepsiCo is
able to increase its market share with its new bottling strategy,
Coke may have to reassess its position.
The acquisitions could also be a first step by PepsiCo in
acquiring additional bottling distributors. PepsiCo's current
master bottling agreement forbids its largest bottlers from
acquiring other independent PepsiCo bottlers outside of their
territories, potentially to avoid making any of the bottlers too
powerful.
However, following these acquisitions, PepsiCo's new bottling
arm could make further strategic acquisitions. PepsiCo currently
has 110 independent bottlers in the U.S., some of which could be
acquired as part of a strategy to improve performance as well as to
restrict competitors' access to certain markets.
While it does make strategic sense for the beverage companies to
acquire bottlers on an individual company basis, these transactions
will probably take the fizz out of the returns for the beverage
industry as a whole by tacking capital-intensive bottling assets
onto an otherwise extremely profitable business of selling
concentrates.
Consider PepsiCo's 2008 return on assets, or ROA, of 13.2%
versus Pepsi Bottling's and PepsiAmericas's 2008 ROA of 5.5% and
6.0%, respectively (not taking into account the premium PepsiCo
will pay or the potential deal synergies). The deal also slightly
increases the volatility of PepsiCo's earnings by exposing it to
commodities such as aluminum and plastic, the major raw materials
for its bottlers.
(Sameer Bhatia is a columnist with Dow Jones Newswires. He can
be reached at 201-938-5863 or by email at
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