(Source: Business Wire)Fitch Ratings expects ratings for U.S. beverage companies to remain stable in 2010. This outlook is based on the companies' continued ability to generate substantial free cash flow, improve cost positions, maintain pricing, and capitalize on international growth opportunities. Additionally, Fitch anticipates no large debt-financed acquisitions aside from PepsiCo, Inc.'s acquisition of The Pepsi Bottling Group, Inc. and PepsiAmericas Inc.

'With commodity prices remaining relatively stable over the past year, we believe pricing will remain modest in 2010, potentially allowing for a return of U.S. beverage volume growth,' said Christopher Collins, Associate Director at Fitch. 'Internationally, U.S. beverage companies should see significant gains due to the weaker dollar.'

Bottler Consolidation - PepsiCo's Bottler Acquisition Will Shake Up U.S. Distribution:

On Aug. 4, 2009, PepsiCo, Inc. (PepsiCo) announced an agreement to acquire the common stock the company did not already own of its major U.S. bottlers, The Pepsi Bottling Group, Inc. (PBG) and PepsiAmericas Inc. (PepsiAmericas), with an offer of cash and equity. The bid was valued at approximately $7.8 billion, a 30% increase from PepsiCo's initial cash and equity offer on April 20, 2009. As a result of the first bid, Fitch downgraded PepsiCo's Issuer Default Rating (IDR) to 'A+' from 'AA-'; affirmed PBG's IDR at 'A+' and downgraded its PepsiCo-guaranteed notes to 'A+' from 'AA-'; and upgraded PepsiAmericas' IDR to 'A+' from 'A'.

PepsiCo's acquisition of its major bottlers represents a significant shift in the company's corporate structure and provides opportunities to rationalize distribution operations. However, Fitch is reluctant to conclude it portends a wholesale change in industry structure going forward. The return on bottling assets is lower than the return on concentrate manufacturing assets, which continues to provide an incentive to structure bottling and concentrate manufacturing as two distinct and separate entities.

More Benefits Seen for PepsiCo Acquisition of Its Bottlers than Coca-Cola Acquisition of CCE:

There are a number of reasons why this type of transaction is more compelling for PepsiCo and its bottlers than for The Coca-Cola Company (Coca-Cola) and its bottlers. First, Gatorade is sold in the same channels as products distributed by Pepsi bottlers but is distributed by PepsiCo (with the exception of G2), so PepsiCo has, in effect, duplicate distribution systems for its beverages. Coca-Cola has for the most part maintained distribution of its entire beverage line-up through its bottlers.

Next, the Pepsi bottling system is more fragmented than Coca-Cola's. More costs can be taken out of a fragmented system through consolidation. PepsiCo's new bottling entity will now be the size of Coca-Cola Enterprises, Inc. (CCE). Corporate functions performed by both Pepsi bottlers can be rolled up into PepsiCo's existing corporate structure, but Coca-Cola would only be able to take on CCE's. By buying the two largest bottlers, PepsiCo is also taking out competitors for purchasing smaller bottlers looking to exit the business.

Third, in a consolidated system negotiations involve fewer players and therefore take less time to gain agreement, which may be why the Pepsi system has lagged in system efficiency efforts. PepsiCo and its bottlers have established a purchasing cooperative to gain purchasing power in buying raw materials. While the Coca-Cola system also has a purchasing cooperative, the Coca-Cola system has undertaken more initiatives, from experimenting with concentrate pricing frameworks to engaging in greater supply chain cooperation. Through a purchase, PepsiCo can effect similar changes but keep a substantial portion of the cost savings (less synergy and control-related premiums paid to PBG and PepsiAmericas shareholders).

Finally, PepsiCo earns a much greater share of its revenues and operating profit from the U.S. market than Coca-Cola does.