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United States Food and Drink Report Q3 2009

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United States Food and Drink Report Q3 2009

The economic downturn looks like it could possibly prompt a wave of consolidation in the US soft andalcoholic drink industries. In the soft drink sector the downturn has prompted PepsiCo to launch a bid forits bottlers in an effort to revitalise sales. Meanwhile, in the alcoholic drinks sector the sprits producerBrown-Foreman is rumoured to be considering a tie up with Bermuda-based Bacardi - a move whichwould create a firm with scale to take on global market leaders, Diageo and Pernod Ricard.In April 2009, soft drinks giant PepsiCo launched a takeover bid for its two largest independent bottlers,Pepsi Bottling Group (PBG) and PepsiAmericas. The cash and share offer represented a premium ofaround 17% on both companies’ closing price on April 17 and would mean PepsiCo controls around 80%of its North American distribution. The move is a sharp shift in strategy - investor pressure actually led toPepsiCo spinning off PBG in 1999 - but has been deemed necessary to respond to the economicdownturn and changing consumer tastes, which have had a substantial impact on PepsiCo’s NorthAmerican sales.So far the two bottlers have been reluctant to accept the terms of the deal. PBG has said the bid issubstantially below PBG’s intrinsic value as well as the value implied by similar transactions. PBG alsosuggests that PepsiCo’s estimate for synergies - of around US$200mn - is inaccurate and that the actualcost savings are likely to be ‘multiples’ of this figure. To defend its position and prevent PepsiCoappealing directly to shareholders instead of negotiating with the PBG board, the company has installed a‘poison pill’ defence that gives existing investors the right to buy shares at a 50% discount if PepsiCoacquires more than 50% of the company. PepsiAmericas has taken a similar tough stance. However, withboth firms seeing their sales and profits hit hard by the economic downturn, BMI does believe that bothare likely to be stronger as part of a larger group and that the deal is eventually likely to go ahead.Meanwhile, in the alcoholic drinks sector reports have emerged that Bermuda-based drinks group Bacardiand US-based Brown-Forman, the maker of Jack Daniels and Southern Comfort, may be mulling over amerger. The reports emerged shortly before Brown-Forman announced it would be cutting around 6% ofits workforce and embarking on a cost-cutting programme in response to the economic downturn. Amerger between Bacardi and Brown-Foreman certainly has strategic merit. Both are medium-sized familybusinesses that would benefit from the increased distribution and marketing muscle that being part of alarger group would facilitate.Over the last 20 years the spirits industry has been consolidating around a handful of firms. However,UK-based Diageo and France-based Pernod Ricard have now secured the top two positions and appear tobe gradually moving away from the chasing pack. This unparalleled scale gives them a distinct advantagewhen negotiating supply contracts and results in economies of scale that could gradually mean themargins of smaller producers are eroded. The larger firms are also in a stronger position to invest inemerging markets, from where the majority of future sales growth is expected to stem.A merger would create an entity with revenues of US$9bn, which would see the new group slot neatlyinto third spot, with revenues only slightly below current number two Pernod Ricard, making it trulycapable of challenging on a global scale. The lack of overlap in the two groups portfolios - with Bacardifocused on rum, and Brown-Forman deriving the majority of its revenues from bourbon - would alsosuggest a merger would be mutually beneficial. Neither would it result in the need to prioritise one firm’sset of brands at the expense of the other.Despite the merits, any merger deal could be scuppered by unwillingness of the founding families to cedecontrol. However, even if the current rumours turn out to be mere speculation, it is easy to see that themove makes long-term strategic sense and the factors forcing the companies together are only likely toincrease as time passes.

AuthorBusiness Monitor International
List Price$495.00
Number Of Pages81
Product GroupBook
Product Type NameABIS_EBOOKS
Publication Date2009-08-05
TitleUnited States Food and Drink Report Q3 2009
Release Date2009-08-05
FormatDownload: PDF
Model Name/TypeMPNEAN/UPC
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