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Quaker's future unclear
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November 22, 2000: 3:47 p.m. ET
With Pepsi in shadows, French company Danone mulls bid for cereal firm
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NEW YORK (CNNfn) - The ongoing courtship of cereal and sports drink company Quaker Oats brought yet another leading suitor in France's Groupe Danone Wednesday, although analysts and investors still clearly viewed PepsiCo Inc. as the most likely potential acquirer.
Shares of Quaker Oats (OAT: Research, Estimates) tumbled $7.50 to $86.94 in late afternoon trading Wednesday as investors digested Coca-Cola Co.'s decision late Tuesday to abandon its efforts to acquire the maker of Rice-A-Roni, Captain Crunch cereal and Gatorade sports drinks.
The decline reversed a nearly three-week run-up in Quaker Oats' stock, driven first by a $13.7 billion bid from Pepsi and then a more than $14 billion proposal from Coke.
The revolving door continued Wednesday as Paris-based Danone (PBN) released a statement saying in light of Coke's decision not to formally bid, "it was reviewing the situation at Quaker."
Coca-Cola issues unusual support for CEO. Click here to read the story.
The news hit Danone's stock in Paris, sending the shares down 10.5 percent to  144.10, while its American depositary receipts (ADRs) fell $2.56 to $24.84 in late day trading on the New York Stock Exchange amid fears the company might enter a deal that would hurt its earnings.
 Analysts have questioned whether Danone (DA: Research, Estimates) could afford a takeover of such a size. In a conference call with analysts Wednesday, Danone warned it would pay for any acquisition with shares and that a deal would not boost earnings per share before 2003.
"There's a big question on price and uncertainty as to what Danone will offer," said Sylvain Massot, an analyst with Morgan Stanley Dean Witter. "The company can offer less and less as its shares fall, and there was a big fall today."
Analysts also seemed skeptical as to whether Quaker Oats shareholders would be open to receiving French stock in exchange for their current holdings, suggesting instead that any deal with Danone would require a sizable cash component.
"I just think Quaker shareholders would not be overly thrilled by getting Danone stock," said Bill Pecoriello, a beverage analyst with Sanford Bernstein.
"As long as there was a collar on Danone's stock, I'd take it," said John McMillan, a food industry analyst with Prudential Securities. "But Quaker started with Pepsi and it might end with Pepsi."
Pepsi buzz sizzles again
Indeed, Purchase, N.Y.-based Pepsi, the world's No. 2 soft drink company, was still largely viewed as the most likely bidder for Quaker Oats Wednesday.
Pepsi walked away from merger negotiations with Quaker Oats earlier this month, leaving a nearly $14 billion stock-swap offer on the table. The negotiations reportedly fell apart after Quaker Oats insisted that a "collar," or price protection mechanism meant to safeguard the company being acquired against sudden downturns in the acquiring company's stock, be included in any agreement.
Interestingly, by the time Coke decided to walk away late Tuesday, there was only a small difference between the reported value of the Pepsi and Coke offerings based on Tuesday's closing prices, with Pepsi valuing Quaker Oats shares $102.30 each and Coke's valuing then at $104.98.
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I think Pepsi is in a great situation. Pepsi could get this done at $90 per share now and really generate some shareholder value.
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Bill Pecoriello
Analyst, Sanford Bernstein |
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Now, analysts said, Pepsi is in an attractive position because it is the strongest bidder remaining, and may even be able to lower its initial offer.
"I think Pepsi is in a great situation," Pecoriello said. "Pepsi could get this done at $90 per share now and really generate some shareholder value."
Investors seemed to think the same, sending Pepsi's (PEP: Research, Estimates) stock down $1.81 to $44.69 in late afternoon trading as investors braced for another large Quaker Oats bid. Coke (KO: Research, Estimates), meanwhile, rose $4.38 to $59.63.
Still, analysts aren't convinced Quaker Oats would agree to a lower bid, particularly after rejecting Pepsi's initial overtures.
"Everybody knew Coke was the one that could pay the most if they wanted to," said John O'Neil, a food industry analyst with UBS Warburg. "Now, this puts the company back to where it was three weeks ago before the Pepsi bid. It clearly can remain an independent company if it wants to. They are not cornered at all."
A large mouthful for Danone
As for Danone, buying Quaker would be quite a mouthful for the French food conglomerate. The U.S. firm has a market value of $12.6 billion, while Danone's capitalization is about $20 billion.
Danone, the world leader in dairy products and the second-biggest bottled water producer, has been looking to expand in the United States after losing to Philip Morris Cos. (MO: Research, Estimates) in the bidding war for Nabisco Group Holdings.
Quaker's cereals business, which makes Captain Crunch and Life cereal, would complement Danone's increasing focus on breakfast foods, while the U.S.'s best-selling sports drink, Gatorade, would slot in well with Danone's bottled water business, analysts said.
 The French company, which owns the Evian mineral water brand, Jacob's snacks, LU cookies and HP sauce, has been selling grocery products and brewing activities to concentrate on beverages, dairy foods and cookies. In March, Danone sold its Kronenbourg beer unit to British brewer Scottish & Newcastle PLC (SCTN) for $2.7 billion.
"An agreement with Quaker could be consistent with Danone Group's stated strategy to create shareholder value through developing a world leader in focused, growth-oriented, healthy nutrition and beverage business," the company said.
Still, analysts said the company could easily renounce its intention to submit an acquisition offer should the price drift to high or its stock price too low.
"Danone can walk away from this any time it likes," said Massot. "It's not dependent on this deal."
Coke sticking with current strategy
Atlanta-based Coke, the world's No. 1 soft drink company, said in a brief statement late Tuesday that it would not be pursuing a transaction with Quaker Oats. The company did not provide a reason for its decision, saying only that it was "enthusiastic" about its current strategic course under new Chief Executive Douglas Daft.
The decision came after a lengthy board meeting meant to discuss joining the two companies in a merger valued by some published reports at upwards of $14 billion. Coke confirmed late Monday that it had entered discussions with Quaker but would not pursue a deal.
In a letter sent to the company's executive committee and group leaders Wednesday afternoon, Daft stressed Coke's "obligation to our shareowners to continually explore opportunities in the marketplace."
In a letter, Daft said the Quaker Oats discussions allowed the board a chance to carefully evaluate its current growth strategy, which to this point has consisted mainly of streamlining the company's operations and refocusing the company on growing its worldwide soft drink market share.
"I am also grateful for the effort our board put into this," Daft said. "We considered our options within the context of our wider business strategy. The board was especially encouraged by our expectations of growth and success."
Quaker Oats is considered valuable mainly for its Gatorade brand, where sales have been growing about 10 percent a year.
Click here to get a taste of Gatorade's allure
Coke and Pepsi are locked in a fierce battle to expand their non-carbonated beverage drinks as soft drink sales continue to slow, particularly in the United States.
Pepsi scored the latest victory in that battle last month when it acquired the South Beach Beverage Co. But industry analysts view Gatorade as the ultimate prize, particularly given the high-growth prospects of the sports drink industry, where Gatorade dominates.
Gatorade holds about a 73 percent market share in the U.S. sports drink category when all sales channels are included. Coke's Powerade ranks second with an 11 percent stake, according to figures compiled by Beverage Digest.
-- CNNfn's London bureau contributed to this report 
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Danone
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