NEW YORK (CNNfn) - Soft-drink giant PepsiCo Inc. said Monday it has agreed to purchase the Tropicana Products Ltd. unit from Seagram Co. Ltd. for $3.3 billion in cash.
The deal, which unites the world's second-biggest beverage company with the largest producer of branded juices, sets up another dimension to the battle between PepsiCo and Coca-Cola Co.
The companies expect the deal to be completed by the end of August.
Tropicana, with nearly $2 billion in 1997 revenue, makes and distributes the Pure Premium, Season's Best and Dole line of juice products.
PepsiCo (PEP) shares gained 3/8 to 39-7/8 in midday trading. Seagram (VO) shares climbed 1-1/8 to 40-15/16.
Analysts were high on the deal, noting the companies should fit well together because both sell most of their products through grocery stores.
"Tropicana is a great grocery brand," said Douglas Lane, an analyst at Merrill Lynch Global Securities. "Tropicana is already showing growth, so PepsiCo is buying a company with momentum."
Roger Enrico, PepsiCo chairman and chief executive officer, said Tropicana will expand PepsiCo's presence in the $16 billion U.S. juice market. He added the deal will boost the company's presence in the morning "daypart," where consumption of PepsiCo's traditional carbonated soft drinks is relatively low.
"It gives PepsiCo an interface on another aspect of the beverage business," said Martin Romm, an analyst at Credit Suisse First Boston. "Tropicana makes healthful products, so they can boost the 'it's good for you' message. And they have similar distribution channels. [PepsiCo] understands how Tropicana gets its product out to market."
Roy Burry, tobacco and beverage analyst at Brown Brothers Harriman, said Tropicana should help expand PepsiCo's international presence.
"It gives PepsiCo a foothold in foreign markets," Burry said. "The Tropicana product line is growing very rapidly in Europe. PepsiCo is trying to rebuild its international carbonated soft-drink business."
The cola-juice wars
Analysts also pointed out that Monday's acquisition bolsters PepsiCo in its battle against Coca-Cola Co. (KO), which owns the Minute Maid Co.
"Tropicana is the only company in my knowledge that in the last 50 years has beat up on the Coca-Cola Co.," Burry said.
"Tropicana has basically won the war. They basically kicked Procter & Gamble out of the orange juice market, and they've pulled ahead of the Minute Maid subsidiary of Coca-Cola."
Seagram said it will use the proceeds from the transaction to pay a part of the cash portion of its previously announced $10.6 billion acquisition of music-recording giant PolyGram N.V., which is scheduled to close in the fourth quarter.
At the time of the PolyGram deal, Seagram said it would sell 95.1 percent of Tropicana in an initial public offering to help finance the acquisition. Seagram said Tropicana will withdraw its IPO filing with the Securities and Exchange Commission.
The Tropicana IPO, which Seagram said would have raised an estimated $3.6 billion, would have been the biggest initial offering in U.S. history.
A PepsiCo spokesman said he was not aware of any financial charges the company would have to incur for the transaction. He added the companies don't anticipate any restructuring at Tropicana, which will operate as a separate division of PepsiCo.
-- by staff writer John Frederick Moore