Antitrust Review Trips Up Pepsico Purchase of Bottler
Plans by Pepsico to buy General Cinema’s soft drink bottling business for $1.5 billion have been derailed by an unexpected federal review of antitrust implications.
The Federal Trade Commission’s request for more information about the sale prevented its completion by Dec. 31 and cost General Cinema tax benefits valued at more than $100 million.
The news pushed General Cinema stock down $1.50 to a close of $24. Shares of Pepsico stock closed at $39.50, unchanged.
“The fact that (the deal) did not close in 1988 means that we do not have an agreement anymore,” said Peter Farwell, a vice president with General Cinema, a Chestnut Hill, Mass., firm that is one of the largest independent bottlers of Pepsico products.
“We’re effectively starting all over again,” he said.
General Cinema’s bottling business had operating profit of $93 million for the fiscal year ending Oct. 31. The firm also operates movie theaters with 1,350 screens, owns 59.9% of the Neiman Marcus Group of retail stores and owns 18% of Cadbury Schweppes, a British candy and soft drinks firm.
Pepsico’s businesses, with 1988 sales of $13 billion, include soft drinks, Frito-Lay snack foods and such restaurant chains as Pizza Hut, Taco Bell and Kentucky Fried Chicken.
Under an agreement reached Nov. 30, General Cinema was to sell Pepsico its soft drink bottling franchises, which are located in California, Florida, Ohio and six other states.
Pepsico planned to pay with 20-year, interest-bearing notes in an arrangement that may have been worth more than $100 million to General Cinema in tax benefits, according to Roy Burry, an analyst with Kidder, Peabody & Co.
But the tax benefit expired Dec. 31, because of changes made by Congress last year for installment sales.
“We’re talking to determine if there’s merit in future discussions,” said James M. Griffith, a spokesman for Pepsico in Purchase, N.Y.
For Pepsico, the transaction would be just the latest in a series of purchases that are part of an industrywide strategy in which the big producers are expanding their ownership of bottlers.
In 1988 alone, the company spent $1.3 billion to buy bottlers, including $705 million in June for a bottling business owned by Grand Metropolitan, the British firm that is taking over Pillsbury Co. Since 1984, Pepsico’s ownership of its bottling volume has almost doubled to 40% from 22%.
Coca-Cola’s $1.4-billion purchase of an independent bottler in Tennessee in 1986 remains the largest such acquisition to date, according to industry observers.
“We’ve always felt like it makes a lot of sense to own a portion of the bottling business,” said Pepsico’s Griffith. Such investment enhances a soft drink producer’s credibility with its independent bottlers, adds to profits and bolsters local marketing efforts, Griffith said.
General Cinema had not revealed its plans for spending the cash from the deal, although analysts had speculated that it might increase its holding in Neiman Marcus, which includes Bergdorf Goodman and Contempo Casuals stores, or raise its stake in Cadbury Schweppes.
Under U.S. antitrust laws, the FTC may review whether big acquisitions, including mergers, will harm consumers by reducing competition and raising prices. For example, the FTC blocked plans by Coca-Cola to buy Dr Pepper in 1986. At about the same time, Pepsico abandoned its plans to take over Seven-Up.
Relatively few deals have been blocked during the free-market-oriented Reagan Administration, however, and the FTC has previously allowed big acquisitions of bottlers by Pepsico and Coca-Cola.
Despite regulatory questions, Joseph Doyle, an analyst with the Smith Barney investment firm, told Reuters News Service that the deal is still so favorable to both companies that they will likely overcome the difficulties caused by the delay.
“There is a 90% chance there will be a new deal, but Pepsi may have to pay $50 million to $100 million more,” he said. “And there may be more cash involved in the deal,” Doyle said.