PepsiCo’s bid for Pepsi Bottling Group labelled “inadequate”


Pepsi Bottling Group (PBG) announced yesterday that the board of directors has reached an unanimous decision to reject the PepsiCo bid to buy out the bottling group.  PBG’s CEO Eric Foss sent a letter to PepsiCo’s CEO Indra Nooyi stating the following:

May 4, 2009
Indra Nooyi
Chairman and Chief Executive Officer
PepsiCo
700 Anderson Hill Road
Purchase, NY 10577

Dear Indra:

We are writing to respond to your proposal of April 19 to acquire all of the outstanding shares of common stock of The Pepsi Bottling Group, Inc. (“PBG”) not owned by PepsiCo. A Special Committee of the Board of Directors of PBG (“the Special Committee”), comprised entirely of independent directors, has carefully reviewed your proposal with the assistance of independent financial and legal advisors. Based on the unanimous recommendation of the Special Committee, the Board of Directors of PBG has concluded that the proposal is grossly inadequate and not in the best interests of PBG and its stockholders.

PepsiCo’s proposal substantially undervalues PBG for many reasons, including:

* Opportunistic Timing: Your proposal was made shortly before the public release of PBG’s strong first quarter 2009 earnings on April 22. As you know, PBG exceeded Wall Street expectations for the quarter, raised its full-year guidance for earnings per share and operating free cash flow, and provided details of its plans to achieve over $250 million in cost and productivity savings in 2009 on a standalone basis.
* Inadequate Value: The value of your proposal is substantially below PBG’s intrinsic value, as well as the value that would be implied by comparable transactions. Your offer is at virtually no premium to market given PBG’s first quarter earnings and upward revision to full-year EPS and operating free cash flow guidance. Transaction premiums, especially those including cash consideration, have been very substantial since the market dislocation last September.
* Understated Synergies: We believe you have substantially understated the synergies that would be available through the combination you have proposed. As you know, PBG has thoroughly analyzed the savings and efficiencies that could be achieved through a transformation of the Pepsi system. Based on our analysis, we are confident that readily achievable synergies are multiples of the $200 million you referenced.

PBG values its longstanding relationship with PepsiCo, but the PBG Board will not agree to a proposal which does not reflect the true value of PBG. Accordingly, based on the Special Committee’s unanimous recommendation, the Board has taken customary steps to protect PBG and its stockholders from opportunistic acquisition attempts.

We remain confident that PBG’s continuing efforts to strengthen its brand portfolio, further improve its performance through operational excellence, and capitalize on geographic growth opportunities position PBG to create substantial value well into the future.

Sincerely,
Eric J. Foss Ira D. Hall
Chairman of the Board and CEO Chairman, Special Committee of the Board of Directors
The Pepsi Bottling Group, Inc. The Pepsi Bottling Group, Inc.

PBG is rightfully portraying its value to PepsiCo saying that the bid is inadequate.  Some analysts have pegged the cost savings to be around $600 million, rather than the $200 million that PepsiCo believes it will recoup by acquiring their bottler.

Now the ball is in PepsiCo’s court, and they must decide how determined they will be in pursuing this acqusition.  Analysts are confident that PepsiCo will submit a higher and more attractive offer, and it makes sense to acquire PBG to gain cost savings and  increase efficiency.  However, what is the price at which this will settle?

PepsiAmericas, the other major Pepsi bottler, still has not responded to PepsiCo’s offer yet.

Stayed tuned for further developments…

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