New Ypork, April 21 - PepsiCo Inc's proposed acquisition of its two largest bottlers announced yesterday could give the U.S. beverage industry the face-lift it needs to better serve consolidating retailers and consumers who now have a lot more choices than a Pepsi or a Coke.
Specifically, Pepsi's $6 billion bid to acquire the shares of Pepsi Bottling Group Inc and PepsiAmericas Inc it does not already own could pressure rival Coca-Cola Co to consolidate its own system, analysts said.
The shares of Coca-Cola Enterprises Inc , Coke's largest bottler, rose as much as 7.6 percent on Monday, as takeover speculation that has smoldered for several years caught fire.
"This is a little bit like a game of chess in which certain moves automatically precipitate equivalent moves," said Tom Pirko, president of Bevmark LLC, a beverage industry consulting firm. "They (Coke) are not going to compete as effectively in North America against the (Pepsi) system leaving distribution and bottling as it is. They're probably going to have to do the same thing."
Coke Enterprises option volume was heavy in afternoon trading, notably call options, which give buying rights to the underlying stock. In all, 5,804 calls and 769 puts traded, nine times the daily combined volume, data from option analytics firm Trade Alert show.
For now, Pepsi and Coke own their soft drink brands, make the drink concentrate, or syrup, and handle marketing while the bottlers buy the concentrate, manufacture and distribute the drinks. Coke and Pepsi both own sizable stakes in their bottlers, which have all been squeezed in recent quarters by weakening sales and high commodity costs.
If Pepsi and Coke buy their bottlers outright, their margins may suffer as the bottling business offers lower returns, but their added heft would put further distance between them and smaller soft drink makers such as Dr Pepper Snapple Group Inc , Cott Corp and National Beverage Corp , Pirko said.
PepsiCo's bid would return the company to the centralized structure it had up until 1999, when it spun Pepsi Bottling off to better compete with Coke's decentralized system.
Coke declined to comment on Monday and Coke Enterprises could not be immediately reached for comment.
A NEW GENERATION
PepsiCo Chief Executive Indra Nooyi said on Monday the decision to create separate bottling companies a decade ago was right for a time when "the category had strong growth, CSDs (carbonated soft drinks) dominated the market, the overall profit pool was expanding steadily, and there were really only two major players."
These days, traditional soft drinks have lost favor as consumers opt for alternatives such as energy drinks and flavored water. U.S. carbonated soft drink volume fell a steep 3 percent last year, according to industry publication Beverage Digest, with declines at Coke, Pepsi and Dr Pepper Snapple.
"In the more mature market of today, there is a need to be more nimble given the increasing role of noncarbs, retailer consolidation, and the changing competitive landscape," Nooyi added.
While Nooyi was influential in PepsiCo's purchase of Quaker Oats back in 2001 when she was chief financial officer, Monday's play for the bottlers marks the company's first revolutionary acquisition push since she became CEO in 2006.
Coke and Pepsi and their bottlers are mutually dependent, although their interests are not always in step, since the concentrate makers serve as both shareholders and suppliers.
JP Morgan analyst John Faucher said it was unlikely Coke would seek to buy its bottler, since it has repeatedly stated publicly it had no plans to do so. Faucher also pointed out that Coke's bottling system is more complex, making a big consolidation push more difficult and expensive.
Coca-Cola has long operated what it has called a "hospital ward" where it acquires smaller bottlers that are doing poorly, fixes them up and spins them off again.
Steve Dixon, manager of the Global Beverage Fund at Arnhold & S. Bleichroeder in New York, said the future might look a lot like the past.
"In a general sense, large companies tend to go in long cycles of consolidating decision-making," said Dixon, whose fund owns shares of Coke, Pepsi and Coke Enterprises, but not Pepsi Bottling or PepsiAmericas. "Five years from now I wouldn't be surprised if the combined bottling groups under new management are spun back out."
Coke and Coca-Cola Enterprises in February said they formed a joint company called Coca-Cola Supply to more closely align their supply chains, a few months after a public rift raised investor fears tensions between the companies could hurt the bottler's business.
Further complicating matters for both systems is the fact the bottlers sometimes sell competitors' brands, such as Coke bottlers selling Dr Pepper and Pepsi bottlers selling Dr Pepper Snapple's Crush brand soda.
Stifel Nicolaus analyst Mark Swartzberg said he understood Pepsi Bottling's agreement to distribute Crush as perpetual, adding he would be surprised to see the distribution affected by a change in control.