FTC Moves to Block Pepsi, Coke in Pending Takeovers

The Federal Trade Commission moved Friday to block both Coca-Cola Co.’s planned purchase of Dr Pepper Co. and Pepsico Inc.’s effort to buy Seven-Up Co.--two deals that would have put 80% of all U.S. soft-drink sales in the hands of the two industry giants.

The decision, which came on a 4-0 vote, had been widely watched as a key indicator of the Reagan Administration’s attitude toward major mergers within highly concentrated industries. The commission instructed its staff to ask a federal District Court to issue preliminary injunctions next week to prevent the two deals from proceeding any further.

While the commission gave little indication of the reasoning behind its decision, many critics had feared that the combinations, involving the four biggest companies in the industry, would dry up soft-drink competition, forcing consumers to accept higher prices and fewer product choices.

One former Administration official who had been involved in drafting the commission’s existing merger guidelines said the FTC decision will help quiet fears that under President Reagan, “anything goes--(that) there are no limits on merger activity.”

However, the vote was not so reassuring to at least one of Capitol Hill’s most vocal critics of Administration antitrust policy.

“What worries me is that we had to face an extreme case, a merger that would have created a two-firm monopoly in a giant industry before getting the FTC to enforce the antitrust law,” California Rep. Don Edwards (D-San Jose) said. He added that the proposed mergers would have been “just an outrage.”

Edwards, a member of the House Judiciary subcommittee on monopolies, had threatened to try to block the deals with legislation if the FTC failed to act.

The mergers already have been challenged in court by Royal Crown Cola, a far smaller competitor who filed suit Thursday in U.S. District Court in Columbus, Ga., where it is based. Friday, in a ruling unrelated to the FTC’s action, U.S. District Judge J. Robert Elliott granted Royal Crown’s request for a temporary restraining order against the sales.

Royal Crown also has invested $200,000 in a national advertising campaign asking consumers to oppose the merger.

Coke and Pepsi’s influence extends far beyond the powerful identification consumers have with their two familiar flagship brands. The soft-drink industry is a complex network of bottlers and distributors who battle for space on supermarket shelves and in vending machines. Independent companies feared that they could be squeezed out by Coca-Cola and Pepsi’s formidable and growing in-house distribution networks.

Invigorate Competition

However, the companies insisted that their planned mergers would actually invigorate soft-drink competition, because they could use their resources to strengthen the Seven-Up and Dr Pepper brands.

A Coca-Cola spokesman, reached at the company’s Atlanta headquarters, declined to comment on the FTC decision; officials at Pepsico’s headquarters in Purchase, N.Y., said they were “obviously disappointed” with the FTC decision and “considering our options for the future.”

However, Larry Jabbonsky, editor of the industry trade magazine Beverage World, dismissed the long-range impact of the FTC decision on consumers. “In terms of the monopolistic effects, well that’s happening without these mergers taking place,” Jabbonsky said. “Perhaps the heads of RC and Seven-Up will get together and put aside their egos and form a viable third franchise.”

Coca-Cola Bid Followed

Pepsico had agreed in late January to buy economically faltering Seven-Up from New York-based Philip Morris Co. for $380 million; Coca-Cola made its $470-million bid for Dr Pepper less than a month later.

Many have speculated that Coca-Cola’s offer was designed to force the antitrust issue and prod the government into blocking Pepsico’s deal, which would have combined the nation’s second- and third-largest soft-drink companies and given them 35% of the market. Coca-Cola already holds 39%, to which Dr Pepper would add about 7%.

In determining whether a merger is anti-competitive, government regulators apply complex mathematical formulas to gauge how much the combination would concentrate sales in the hands of a few companies.

Consider Other Factors

Beyond that, they also consider other factors, such as the ease with which a new competitor may enter the market.

In the soft-drink industry, it is relatively difficult for an upstart to assemble the extremely high capital investment required, and investors are further discouraged by razor-thin profit margins.

Karen Tumulty reported from Washington; Jube Shiver reported from Los Angeles.