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Quaker stock steaming hot
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December 1, 2000: 5:05 p.m. ET
Pepsi reportedly in talks yet again to add the Gatorade parent to its portfolio
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NEW YORK (CNNfn) - Shares of Quaker Oats gathered steam yet again Friday as investors digested speculation that the cereal and sports drink company could wrap up merger negotiations with PepsiCo Inc. by the end of the weekend.
The two companies are reportedly discussing virtually the same deal they walked away from last month, when Pepsi offered to swap 2.3 shares of its stock for each outstanding Quaker Oats share.
Based on Pepsi's closing price of $42.38 Friday, that would value the maker of Captain Crunch cereal, Rice-A-Roni and Gatorade at $97.48 per share, or nearly $12.78 billion. Quaker Oats (OAT: Research, Estimates) shares climbed as high as $90.50 Friday before falling back slightly to finish the day at $88.63, up $1.69.
Combined, the two companies would represent a powerful force in both the packaged foods and beverage industries. Pepsi, already the world's No. 2 soft drink maker, would add one of the world's leading producers of hot and ready-to-eat cereals, as well as Gatorade, the dominant brand in the sports drink industry.
 Analysts said obtaining the Gatorade brand would be a major coup for Pepsi, which is in a frantic race with rival Coca-Cola (KO: Research, Estimates) to beef up its non-carbonated beverage products as soft drink sales slow. Gatorade holds a 73 percent market share in the take-home sports drink category and represents the fastest-growing portion of Quaker Oats' portfolio.
"It's a perfect fit because Pepsi has a hole in its product line," said Manny Goldman, a beverage analyst with ING Barings. "In the noncarbonated segment, Pepsi is pretty well set in fruit drinks and water and many other things, but they don't have a sports drink that counts."
Pepsi and Quaker Oats first seriously entertained a merger earlier this month, but talks broke down when Quaker Oats insisted the agreement contain a price "collar" designed to protect its shareholders against a sudden downturn in Pepsi's share price.
Coke then stepped in and appeared on the verge of a $15 billion merger with Quaker Oats, but those talks ultimately failed as well when Coke's board balked at the deal's hefty price tag. French food conglomerate Danone also showed some interest in making a bid, but passed when its shareholders pummeled the company's stock on the news.
It was not immediately clear Friday whether Quaker Oats was continuing to insist on such a clause. The Wall Street Journal, which first reported the new negotiations between the two companies, said the Chicago-based firm was now pushing for a walk-away provision that would allow it to cancel the merger if Pepsi's stock fell far enough to push Quaker Oats' valuation under $90 per share.
Such a provision could ultimately prove significant depending on how Wall Street views the combination.
Still, the early indications were positive for the Purchase, N.Y.-based company.
After opening sharply lower, Pepsi (PEP: Research, Estimates) shares eventually firmed by late morning and ultimately traded in a narrow range all day, finishing the day down $3 to $42.38 -- keeping Quaker Oats' valuation well above the $90-per-share level.
 Analysts reiterated Friday that at those levels, the combination still makes tremendous sense for both sides.
"It's still a nice premium to where Quaker had been trading at before the first talks were announced," said John O'Neil, a food analyst with UBS Warburg. "When the valuation climbed to more than $100 per share, we were calling it 'generous.' The high-90s is a very fair price."
Bill Pecoriello, a beverage analyst with Sanford Bernstein, said at the current buyout price, he believes Pepsi could deliver 10 percent operating profit growth and 12 to 13 percent earnings-per-share growth following the deal's closing.
"We believe PepsiCo's underlying rationale for buying Quaker Oats makes strong strategic sense," he said in a research note Friday. "With Gatorade, Pepsi would have the No. 1 noncarbonated portfolio and the fastest-growing total U.S. beverage portfolio."
The transaction is expected to be accounted for as a pooling of interests, meaning Pepsi could not sell any of Quaker Oats' businesses, including its slower-growth food products, for at least two years, to avoid a major tax penalty. 
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