PepsiCo, PBG Thrust & Parry

There is sword-play between PepsiCo (PEP - Analyst Report) and Pepsi Bottling Group (PBG - Analyst Report). Back on April 19th, PepsiCo proposed to acquire all of the outstanding shares of common stock of the Pepsi Bottling Group at $29.50 per share. However, on May 5th, the Board of Directors of Pepsi Bottling Group rejected a proposal as grossly undervaluing the company.

Then on May 11th, PepsiCo sued Pepsi Bottling Group on the grounds of not giving PepsiCo’s two board members proper notice of the Pepsi Bottling Group board meeting, in which the bottler's board voted to reject the PepsiCo’s offer and approved a shareholder rights plan -- aka a "poison pill."

We expect PepsiCo will ultimately announce a higher offer for the Pepsi Bottling Group. PepsiCo obviously believes that the shares of Pepsi Bottling Group are attractive. In addition, management of PepsiCo is seeking not only to invest its cash flow in a growth vehicle, but also gain more control over the distribution of its products.

In the meantime, management of Pepsi Bottling Group is implementing its plan to expand the company’s U.S. footprint across contiguous territories. Most recently, on May 14, 2009, the Pepsi Bottling Group announced the intent to acquire Pepsi-Cola Bottlers for the Merrimack Valley, which serves northeastern Massachusetts.

Over the last year, the company acquired Pepsi-Cola Batavia Bottling, which serves parts of upstate New York; Lane Affiliated Companies, the eighth largest Pepsi bottler in the U.S. with operations in Colorado, Arizona and New Mexico; and Better Beverages, a Pepsi-Cola and Dr Pepper Snapple Group, Inc. (DPS - Analyst Report) franchised bottler that serves portions of central Texas.