PepsiCo to Buy Quaker Oats, Source Says

PepsiCo Inc. has agreed to pay $13.4 billion in stock to acquire Quaker Oats Co., a source familiar with the negotiations said, ending more than a month of speculation over who might acquire the maker of Gatorade and Cap’n Crunch cereal.

The boards of both companies approved the deal over the weekend and an announcement is scheduled for today, the source told Associated Press on Sunday on the condition of anonymity.

By adding Gatorade to its fleet of noncarbonated beverages, which includes Aquafina water, Lipton teas and Tropicana juices, PepsiCo would gain control of the dominant brand in the $2.5-billion sports drink category, which has been growing faster than colas.

“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.

At least two PepsiCo rivals had a similar thirst to acquire Quaker Oats: the board of Coca-Cola Co. abandoned talks to buy Quaker for a reported $15.75 billion two weeks ago and French food conglomerate Danone backed away from a possible bid.

In the end, PepsiCo beat out its competitors with an offer that essentially mirrored its bid that was rejected by Chicago-based Quaker Oats roughly one month ago.

The source said PepsiCo was offering 2.3 of its shares for each Quaker Oats share. Based on PepsiCo’s closing price of $42.38 on Friday, the offer valued Quaker Oats at $13.4 billion or $97.46 per share.

Under the terms of the deal, Quaker Oats can back out if PepsiCo’s stock dips below $40 a share for a period of 10 random days in the month before closing. Under this scenario, PepsiCo would have to increase the share-exchange ratio in order to keep the deal alive.

Representatives at PepsiCo, based in Purchase, N.Y., would not comment on the matter. Quaker Oats did not return calls.

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. However, PepsiCo has agreed to get rid of All-Sport in order to keep the deal alive.

Tom Pirko, who heads the beverage consulting firm Bevmark in Santa Barbara, said a PepsiCo-owned Gatorade would actually be good for competition. Under PepsiCo, Gatorade would benefit from a vast distribution system and over time would spur demand for more products in the sports drink category, he said.

Pirko said the acquisition of Quaker Oats, and Gatorade in particular, would give PepsiCo a “huge psychological edge” in its competition with Atlanta-based Coca-Cola, the world’s leading soft drink manufacturer. PepsiCo is building a formidable “package of leading brands,” he said.

While picking up Gatorade was no doubt the primary thrust of this transaction for PepsiCo, analysts were quick to point out that Quaker Oats’ food products, which include granola snack bars and rice cakes, 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.

Quaker Oats’ vast food business includes such brands as Quaker and Cap’n Crunch cereals, Aunt Jemima mixes and syrup and Rice-A-Roni.

Coca-Cola abandoned its pursuit of Quaker Oats after the soft drink company’s board rejected a deal reportedly worth $15.75 billion. Only hours after Coca Cola’s announcement, the French food conglomerate Danone issued a statement that it may be interested in making a bid for Quaker Oats. But it also dropped out of the running.

Gatorade began in the 1960s as a drink for thirsty athletes but has become a mainstream beverage.

Beverage Digest estimated Gatorade accounted for 84.1% of take-home sales of sports drinks in the first nine months of this year. Coke’s Powerade had 10.9% while PepsiCo’s All-Sport had 2.8%, Beverage Digest said.

PepsiCo’s Pepsi-Cola division is the nation’s second-biggest soft drink concern with brands such as Pepsi, Diet Pepsi and Mountain Dew. Atlanta-based Coca-Cola is the soft drink leader.

PepsiCo has been moving to expand its noncarbonated drink portfolio. It recently agreed to buy South Beach Beverage Co., which makes herbally enhanced juices and teas.