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Pepsi Gets to Buy Quaker

REUTERS

PepsiCo Inc. got the green light Wednesday to buy Quaker Oats Co. and its top-selling Gatorade brand for about $14 billion after the Federal Trade Commission deadlocked over whether the new company would harm competition in the sports drink market.

FTC commissioners voted 2 to 2 on going to court to block Pepsi’s purchase, one vote short of the majority needed to file suit. A unanimous decision was then taken to close the investigation of the deal, an agency statement said.

Shares of Quaker Oats, after being halted for the FTC announcement, shot up 14%, or $12.30, to close at $100.30 on the New York Stock Exchange. PepsiCo, the No. 2 soft drink maker, fell $2.94, or 6.3%, to close at $43.69.

Quaker’s Gatorade, with a 78% share of U.S. sports drink volume last year, would increase PepsiCo’s U.S. drink sales by almost 10% and aid its battle against No. 1 beverage maker Coca-Cola Co., analysts have said.

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Coca-Cola’s Powerade line commands 15% of the sports drink market and Pepsi’s existing All Sport brand has 4.4%, according to industry newsletter Beverage Digest.

To blunt competition concerns, Pepsi said May 1 it would sell the All Sport brand to Monarch Co., the Atlanta-based maker of Dad’s Root Beer.

Despite that concession, FTC staff lawyers feared competition from All Sport would evaporate if the brand was cut loose from Pepsi’s distribution system and recommended that agency commissioners block Pepsi’s purchase of Quaker Oats.

The FTC’s new chairman, Bush appointee Timothy Muris, recused himself from the vote because of a conflict of interest.

The remaining four commissioners split along party lines.

Democrats Sheila Anthony and Mozelle Thompson voted to block the deal, while Republicans Orson Swindle and Thomas Leary said there was insufficient evidence of adverse competitive effects to take to court.

“Allowing PepsiCo to further consolidate its soft drink position by acquiring Quaker Oats and its popular Gatorade products raises obvious and significant concerns that competition will be lost in the highly concentrated soft drink industry,” Anthony and Thompson said in a statement.

But Swindle and Leary said the FTC should monitor the industry carefully and “seek appropriate relief against any firms engaged in anti-competitive conduct, including, if necessary, post-acquisition divestitures.”

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PepsiCo, the maker of Pepsi soft drinks, Frito-Lay snacks and Tropicana juices, said after the FTC decision that it would not distribute Gatorade in its bottling system for 10 years as part of the agreement to sell All Sport to Monarch.

But PepsiCo will be able to use Gatorade’s broker warehouse distribution system, which has helped Gatorade become so successful, PepsiCo spokesman Richard Detwiler said. “We think Gatorade has lots of growth opportunities,” he said.

Marc Cohen, beverage industry analyst at Goldman Sachs, said PepsiCo had given up the opportunity to sell Gatorade in soft drink vending machines. Goldman Sachs has estimated vending machines could have added about $100 million a year to Gatorade sales and would have minimal impact on PepsiCo earnings.

Caroline Levy, beverage industry analyst at UBS Warburg, said the Gatorade distribution system could benefit PepsiCo’s Tropicana orange juice business.

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“The large part of why they did the deal is they can take Tropicana through Gatorade’s distribution system and accelerate Tropicana’s worth,” Levy said.

PepsiCo expects to close the Quaker Oats deal in the next several business days and complete the All Sport sale Wednesday.

Purchase, N.Y.-based PepsiCo and Quaker Oats announced their deal Dec. 4 last year.

Chicago-based Quaker, whose food products include hot and cold cereals such as oatmeal and Cap’n Crunch, Rice-A-Roni side dishes, and Aunt Jemima pancake mix, had been the subject of merger rumors for years.

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