Pepsico Agrees to Buy Seven-Up in Cash Deal Worth $380 Million

In a bid to take the sizzle out of the soda sales of industry leader Coca-Cola Co., the nation’s second-largest soft-drink maker, Pepsico Inc., said Friday that it has agreed to purchase Seven-Up Co. for $380 million in cash.

While the deal is subject to government approval, the sale of Seven-Up by parent company Philip Morris Cos. would give Purchase, N.Y.-based Pepsico an estimated 35% share of the domestic soft-drink market, compared to 39% for Coca-Cola.

It would also strengthen Pepsi’s sales overseas, where it trails the ubiquitous Coke, officials forecast.

“Seven Up . . . has the potential to become one of the most popular soft drinks in the world,” Donald M. Kendall, Pepsico’s chairman and chief executive, said in a prepared statement Friday. “By working closely with the existing network of independent franchised Seven-Up bottlers, we can increase volume and strengthen the overall Seven-Up organization.”

With Philip Morris’ and Pepsico’s stock prices gyrating up and down as rumors of the sale circulated this week, Wall Street investors finally signaled their approval Friday in trading on the New York Stock Exchange. Pepsico closed at $68.25 a share, up $1.625. Philip Morris rose $1.875 to $91.625. Coca-Cola closed at $80.25, up $1.25.

Antitrust Issues

Still, analysts questioned whether the transaction might present an antitrust problem too sticky to pass government muster even under the permissive Reagan Administration.

“This is a concentrated industry to begin with,” said Lawrence J. White, a New York University professor and former chief economist for the Justice Department’s antitrust division. “I think you have to worry about the likelihood of non-competitive behavior if the purchase goes through.”

Coca-Cola, which would face stiffer competition from Pepsi, said it was unconcerned. “The ownership of Seven-Up does not change (our marketing) strategy,” Coke spokesman Ron Coleman said. “The Coca-Cola Co. is the world’s largest producer of soft drinks, and it will always be.”

In the next few weeks, the Federal Trade Commission and the Justice Department will decide informally which of the two agencies will examine the transaction for its effect on competition.

Federal Trade Commission and Justice Department spokesmen would not comment on the prospects of U.S. approval of the sale. However, several analysts speculated Friday that Pepsi probably would not have entered an agreement if the firm were not optimistic about government approval.

Acquire Trademark

Under the terms of the agreement announced Friday, Pepsico would acquire only Seven-Up’s worldwide trademark and franchised beverage business. Philip Morris would retain ownership of 16 bottling plants in the United States and Canada as well as packaged foods and agricultural units of Seven-Up, Philip Morris spokesman Thomas Ricke said.

“We intend to sell these remaining operations,” Ricke said. “We hope to break even when all the units are sold.” Philip Morris bought Seven-Up in 1978 for $580 million.

Although the soft-drink industry has grown more concentrated in recent years, shrinking to 1,500 bottling plants in 1983 from 6,330 in 1950, it has remained highly profitable. Per-capita consumption of sodas has soared to more than 40 gallons a year in 1985 from about 16.2 gallons in 1965, according to a study conducted by the Boston Consulting Group.

Positioning itself as a caffeine-free soft drink (“Never had it; never will”), Seven-Up has dominated the lemon-lime category, holding a 51.7% market share in 1984, compared to 34.6% for Coca-Cola’s Sprite and a paltry 1.1% for Pepsi’s Teem, according to the most recent data from Beverage World, a trade publication.

Though the lemon-lime category overall trails colas and accounts for only 12.7% of all soft-drink sales, it has recently been invigorated by the introduction of new products containing real lemon and lime juice such as Pepsi’s Slice and Coca-Cola’s recently announced Minute Maid soda products.

But Philip Morris, a consumer products company that is the nation’s largest producer of cigarettes, has failed with Seven-Up to duplicate the same marketing success that it scored with Marlboro cigarettes and Miller beer.

“It was a matter of efficiency of scale--Coke and Pepsi were too big, and Seven-Up had a smaller network of bottlers,” said Gary Langbaum, an analyst for Northern Trust Co. in Chicago.

Expects Loss in 1985

Seven-Up earned $33 million during its first 19 months under Philip Morris but then suffered losses of $7.1 million, $1.7 million, $1.2 million and $10.8 million from 1980 to 1983. It rebounded to earn $5.3 million in 1984, but Emanuel Goldman, an analyst with Montgomery Securities in San Francisco, expects Seven-Up to lose $5 million to $10 million in 1985.

Analysts expect Pepsico to fare much better if its deal with Philip Morris is consummated.

“It will add nice numbers to Pepsi’s overall 25% to 27% market share,” said Jesse Meyers, publisher of Beverage Digest. Seven-Up “adds strength to Pepsi’s position in the Philippines, Argentina, Holland, Ireland, Greece and Egypt.”

What’s more, Pepsi will acquire a product that is as synonymous with the lemon-lime category as Coke with the cola category, said George D. Wolff, president of the Pepsi-Cola Bottlers Assn.

“People who want a cola don’t really think which one. They just automatically say, ‘I’ll have a Coke,’ ” Wolff said. “Same thing with Seven-Up.”

WHERE THEY STAND

In millions of dollars 1984 1985 est. PEPSICO Revenue 7,699 8,050 Operating income 951 1,047 SEVEN-UP Revenue 734 720 Operating income 5.3 (5-10 Loss)

Sources: Standard & Poor’s; Philip Morris annual report; Value Line (for Pepsico 1985 est.); Montgomery Securities (for Seven-Up 1985 est.)