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PepsiCo scores Quaker Oats
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December 3, 2000: 10:55 p.m. ET
World's No. 2 soft drink maker adds Gatorade parent in $13B all-stock merger
By Staff Writer Tom Johnson
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NEW YORK (CNNfn) - Soft drink maker PepsiCo struck an agreement Sunday to purchase Quaker Oats for nearly $13 billion in stock, sources close to the situation said, ending a month-long courtship to acquire the parent company of Gatorade, the dominant brand in the fast-growing U.S. sports drink category.
The merger, which will officially be announced Monday morning, ends a roller coaster odyssey for Quaker Oats (OAT: Research, Estimates), which at one point during the last month flirted with merging with Pepsi, Coca-Cola Co. and French food conglomerate Groep Danone.
A spokesperson for the Purchase, N.Y.-based Pepsi could not be reached for comment and Quaker Oats' spokesperson declined to comment.
However, sources told CNNfn.com that the agreement calls for Pepsi (PEP: Research, Estimates) 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 values the Chicago-based company at $97.47 per share, or $12.8 billion based on Quaker Oats 131.1 million outstanding shares as of Sept. 30.
In addition, PepsiCo will assume about $761 million in Quaker debt, and will receive a breakup fee of $420 million if Quaker calls off the transaction to go with another partner, according to the Wall Street Journal's interactive edition, which first reported the merger agreement Sunday.
 PepsiCo and Quaker said in a statement issued late Sunday they will hold a presentation that "will address a major development involving the two companies" at 9 a.m. ET Monday.
The agreement occurred nearly a month after the two companies walked away from virtually the same proposal after Quaker Oats insisted on a price protection "collar," which would protect its shareholders against a sudden decrease in Pepsi's stock price.
The Journal reported the two sides have agreed to some price protections in place of a collar, including giving Quaker Oats the option of walking away from the deal if Pepsi's stock price falls below $40 on 10 randomly selected days during the month prior to the deals closing. If that happens, Pepsi also has the option of raising its offer to ensure the transaction values Quaker Oats at $92 per share. Pepsi's bid is capped at a valuation of $105 per Quaker Oats share.
As part of the transaction, Pepsi Chairman and CEO Roger Enrico also plans to accelerate his previously-announced departure and hand over both positions to company President Steve Reinemund this Spring, when the transaction is expected to close, the Journal quoted Enrico as saying.
Enrico, who had previously said he would step down as chief executive at the end of 2001 and as chairman the following year, will remain as vice chairman of the board.
Robert Morrison, Quaker Oats' well-regarded chairman and chief executive, will remain as a vice chairman of the combined company's board for at least 18 months after the deal closes, the Journal said.
Analysts have maintained all along that adding Quaker Oats would represent a major coup for Pepsi, which is engaged in a pitched battle with chief rival Coke to build out their non-carbonated beverage portfolios.
Gatorade is by far the most dominant brand in the $2.5 billion sports drink category, controlling nearly three-quarters of the take-home sales in that market.
Though the sports drink has been by far the fastest-growing product in Quaker Oats' broad portfolio, which also includes Captain Crunch cereal and Aunt Jemima syrup, and now represents roughly 40 percent of the company's overall sales, analysts have long theorized the sports drink could experience even greater growth when combined with a major distribution network like Pepsi's.
"Gatorade would do even better under PepsiCo than it has under Quaker Oats because of better marketing and distribution," said John Sicher, a veteran soft drink industry watcher who publishes Beverage Digest in New York.
Coke Chairman Douglass Daft nearly sealed a $15.75 billion merger agreement with Quaker Oats two weeks ago himself, only to watch his board squash the deal at the 11th hour – a move some analysts said may ultimately haunt the world's No. 1 soft drink company.
With Coke (KO: Research, Estimates) out of the picture and Danone's board declining to pursue a deal after its shareholders reacted harshly to its interest, Quaker Oats was left with little choice but to return to Pepsi's original offer, analysts said.
"I think (Quaker Chief Executive Robert) Morrison did the best job he could for Quaker Oats shareholders," John McMillin, food industry analyst at Prudential Securities, said. "It took a while, but you can't blame him for courting Coca-Cola."
PepsiCo has been moving to expand its non-carbonated drink portfolio, which currently includes Aquafina water, Lipton teas and Tropicana juices. It recently agreed to buy South Beach Beverage Co., which makes herbally-enhanced juices and teas.
The deal could raise antitrust concerns because of PepsiCo's ownership of All-Sport, a competing brand to Gatorade, albeit with much less market share, estimated to be around 5 percent. PepsiCo would likely have to agree to divest of its All-Sport holdings as part of any agreement with federal regulators.
While picking up Gatorade was seen as the primary thrust of this transaction for PepsiCo, analysts have said that several of Quaker Oats' food products, including granola snack bars and rice cakes, will nicely complement PepsiCo's line of salty snacks.
"Quaker Oats' grain-based snacks could show real growth within the Frito-Lay marketing and distribution system," Sicher said." PepsiCo's Frito-Lay division is the nation's leader in salty snacks with brands such as Lay's, Fritos and
Doritos chips.
-from staff and news service reports 
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