From The Street.com
Coke Was Only Part of the
Problem for Pepsi Bottling's
IPO
By Gregg Wirth and Katherine Hobson
Staff Reporters
4/1/99 7:00 AM ET
Give this pre-emptive strike to Coca-Cola
(KO:NYSE) in the latest battle in the ongoing cola
wars.
Investment bankers at several Wall Street firms
were puzzled as to why Wednesday's $2.3 billion
initial public offering of Pepsi Bottling Group
(PBG:NYSE) was as flat as day-old cola. The deal,
priced at 23 Tuesday night, hit the market flat
Wednesday morning, then was battered around on
volume of almost 62 million shares. The stock
closed at 21 11/16, down 1 5/16, or almost 6%.
Speculation about why the largest IPO so far this
year appeared to be such a dud spawned several
theories on Wall Street. Chief among them was the
unfortunate timing of the offering, presented just two
days after Coca-Cola shocked investors by warning
that it expects to report that total sales volume fell
1% to 2% during the first quarter.
Unfortunately for Pepsi Bottling, the slip wasn't just
from continued weakness in international markets:
North American sales, which had appeared to be
humming along nicely early in 1999, were expected
to inch up just 2%. Price increases implemented by
Coke to shore up margins apparently scared off
consumers.
Still, Pepsi Bottling was eager to draw a line. "It's
not about today, it's about the long-term story,"
says spokesman Larry Jabbonsky. "It's a
tremendous opportunity for us to do what we do
best: focus on bottling." He says he's "not sure" if
Coke's announcement weighed down the IPO.
Spokesmen for Merrill Lynch (MER:NYSE) and
Morgan Stanley Dean Witter (MWD:NYSE), the
deal's co-lead underwriters, declined to comment.
"People are focusing on the Coke announcement,"
says Richard Joy, an equity analyst at Standard &
Poor's. "The concern is that Pepsi (PEP:NYSE)
could run into a shortfall," though that's not
necessarily so, he says. Both Coke and Pepsi had
decent volume gains in January and February,
according to analysts.
"People are focusing on the Coke
announcement. The concern is that
Pepsi could run into a shortfall." --
Richard Joy, an equity analyst at
Standard & Poor's
So it's too early to tell whether Pepsi will parallel
Coke's March declines, which in turn would show
up in the bottling company, or gain share on the
heels of its new "Joy of Cola" ad campaign.
An equity chief at a rival investment bank says the
underwriters were faced with a Hobson's choice in
taking the deal public right after the Coke news.
"They couldn't pull back on the Pepsi IPO by that
time -- it's just like having a plane ready on the
runway, you can't call it off," he adds.
The Coke announcement reaffirmed concerns about
the deal that surfaced during the road show,
according to one investment banker close to the
deal, who requested anonymity. "There was a
certain amount of skepticism about the
management team's ability to pull off such a
turnaround story," says the banker. "I mean, the
CEO, Craig Weatherup, he's one of the guys that
lost the cola wars." Weatherup is a 25-year veteran
of the company, and one of Pepsi CEO Roger
Enrico's top lieutenants.
The banker says that during the road show with
investors, Pepsi Bottling's management fumbled
some key questions from potential investors.
Managers described their supermarket pricing as
"improved," before adding the caveat, "but let's see
what happens after Memorial Day," the banker
says.
When asked if Pepsi Bottling would pursue
acquisitions of smaller bottlers, management
demurred, the banker says. "They said, 'We're not
doing any more acquisitions because of the Y2K.' "
That can of worms was left open, the banker says.
"I mean, I'm not implying that these guys sabotaged
the deal, but I think they didn't want to overpromise
and underdeliver."
Jabbonsky, the Pepsi Bottling spokesman, denies
there were any problems with the road show.
Company executives have to be cautious when
talking about pricing, he says, and a
growth-through-acquisitions strategy continues to
be part of the company's formula. "That comment
must have been misinterpreted," he adds. "This
deal was not about dot-com hype -- it was about
consistency and focus."
Several other deal watchers had additional theories,
including the inevitable failure of anything
non-Internet. "It's hard to get a deal done if it's not
an Internet company," says Kathy Smith, portfolio
manager for Renaissance Capital's IPO
Aftermarket fund. "Money is being siphoned away
from companies that aren't Internet."
It's unfortunate what's happening with non-Internet
companies, but it may not be a bad investment for
some people, Smith explains. "All these investors
complain they can't get enough IPO shares," she
says, adding that there are new companies trading
below their IPO price that could be a good
investment for value investors, "if there are any value
investors left anymore."
The sheer size of the offering was also a "big
negative," says S&P's Joy. And the bottling
business is by no means a painless investment.
"Bottlers are going through a period of heavy capital
investment, infrastructure investment, and are
taking on a lot of debt," says Joy. "They've got a lot
of interest expense, depreciation, and are making a
lot of acquisitions.
"Earnings are pretty much chewed up by these
noncash charges," he says.
Still, for investors bullish on the soft-drink industry's
long-term prospects, the bottlers are a way to build
on the investment, he says. |
