Coca-Cola Expected to Win in Contest for Quaker Oats

Coca-Cola Co. is likely to win the race to gobble up Quaker Oats Co. and its prized sports drink Gatorade, analysts said Monday, though Coke’s stock fell on concern that a potential bid of as much as $15 billion could be too expensive.

Coca-Cola confirmed Monday that it was in discussions with Chicago-based Quaker about a possible transaction but would provide no details.

“Nobody can really afford to compete against Coca-Cola, because it has such a highly valued stock price,” said William Leach, food industry analyst at Banc of America Securities. “It really just comes down to if Coke wants it or not.”

What Coke would want is to swallow up Gatorade, which controls more than 80% of the sports drink market, before archrival PepsiCo Inc. does, analysts said.

Gatorade would strengthen either company’s position in the growing noncarbonated beverages market, helping offset sluggish sales of carbonated drinks. Both soft drink giants would be able to expand Gatorade’s reach internationally, something Quaker cannot easily do on its own, analysts said.

PepsiCo reportedly bid about $13.7 billion for Quaker earlier this month, a bid that Quaker--which also makes Cap’n Crunch cereal, Quaker Oatmeal and Rice-A-Roni side dishes--rejected, saying it wanted a better price.

Sources familiar with the talks told Reuters on Sunday that the proposed Coca-Cola deal valued Quaker at about $115 a share. But that price may have come down some Monday as Coca-Cola’s stock fell.

Shares of Atlanta-based Coca-Cola fell $4.88 to close at $56.56 on the New York Stock Exchange.

Late in the session, Coca-Cola issued a statement saying it “would only consider an agreement that advances the Coca-Cola Co.’s strategy of continuing to build a total nonalcoholic beverage company.”

Quaker closed up $4.69 at $95 on the Big Board after soaring earlier in the day to an all-time high of $98.94, with shareholders enjoying the feeding frenzy around the company.

A deal between Coca-Cola and Quaker Oats is by no means certain. One of the big stumbling blocks could be persuading Coca-Cola’s board to approve such an expensive deal, especially while Coca-Cola is going through a major restructuring. Coca-Cola’s board will meet Tuesday to consider the bid.

Quaker Oats declined to comment on a potential bid.

Although now might not be the right time for Coca-Cola to buy Quaker, PepsiCo’s earlier bid forced its hand, analysts said.

Analysts would not rule out the idea of Purchase, N.Y.-based Pepsi making a higher bid, and some said that since about two-thirds of PepsiCo’s profit comes from snack foods, Pepsi might be able to better expand Quaker’s food businesses.

But “I don’t think Pepsi can go to this level,” said Caroline Levy, beverage analyst at UBS Warburg.

Analysts also said that other companies that may have been interested in Quaker Oats, including French food group Danone and Swiss food giant Nestle, would not be able to pay as much as Coke.

One concern for Coca-Cola could be that 60% of Quaker’s business still comes from food, which includes dry cereals, a category that has been nearly flat in recent years. Food does not fit naturally with Coca-Cola’s business, but the company could be kept from selling off that business for at least two years if it chose to use financially attractive “pooling of interests” accounting in the deal.

Still, Gatorade is such a prize that Coca-Cola would probably be willing to absorb the food business, which analysts say could bring anywhere from $5 billion to $7 billion when it is eventually sold.