Broadcom makes offer for Emulex; PepsiCo predicted to bump bottlers bids; Coca-Cola may follow

By Cristal Cody

Tupelo, Miss., April 21 - Broadcom Corp.'s hostile offer on Tuesday to buy Emulex Corp. at a 40% premium for $9.25 a share in cash is more than fair, but the board is unlikely to accept it, an analyst told Prospect News.

Meanwhile on Tuesday, analysts expect PepsiCo, Inc. to come back with a higher bid after the company offered $6 billion in cash and stock to acquire its two largest bottlers.

PepsiCo's move also fueled analysts' predictions that Coca-Cola Co. could follow suit and acquire its largest bottler, Coca-Cola Enterprises Inc.

On Wall Street Tuesday, stocks recovered slightly after Monday's selloff to pull the Dow Jones Industrial Average up 127.83 points, or 1.63%, to close at 7,969.56.

The Standard & Poor's 500 index rose 17.69 points, or 2.13%, to 850.08, while the Nasdaq Composite index added 35.64 points, or 2.22%, to end at 1,643.85.

Broadcom goes hostile

Irvine, Calif.-based Broadcom said the $764 million cash deal will be funded from its $2 billion of existing cash and marketable securities on hand.

Broadcom develops semiconductors for wired and wireless communications equipment, while Costa Mesa, Calif.-based Emulex makes data networking storage products.

Samuel Wilson, an analyst with JMP Securities LLC who covers Emulex, told Prospect News that the bid is fair, "given the fact it's a 40% premium" to Monday's stock closing price. "So far, they turned down the discussion in January, so it doesn't look like it's going to go through yet."

Emulex said in a statement that the board will review the proposal.

Broadcom said Tuesday that it first approached Emulex about a deal in December and the company cut off communication in January.

"Even more troubling was the fact that merely one week after that communication, you took actions clearly designed to thwart the ability of your shareholders to receive a premium for their shares. These included adopting a poison-pill and amending your bylaws," Scott McGregor, president and chief executive officer of Broadcom, said in a letter sent to the board at Emulex.

Broadcom also filed a lawsuit against Emulex on Tuesday in the Delaware Court of Chancery to declare the recently amended bylaws invalid.

"Broadcom has a long and successful experience, through over 40 transactions, of integrating companies into Broadcom, so this is a highly achievable proposal to deliver value to customers and employees of both companies," McGregor said.

Michael Burton, an analyst with Thinkequity LLC who covers Broadcom, said the company appears committed to closing the acquisition.

"They are certainly trying to make this happen," he said.

A deal between Broadcom and Emulex is "very complementary," Burton said. "The two companies share some of the same customers. There's very little overlap from a product perspective."

Emulex shares closed up $3.09, or 46.75%, at $9.70 on Tuesday. Shares have traded from $4.53 to $14.74 over the past year.

Broadcom's stock fell $1.27, or 5.83%, to close at $20.52.

Pepsi may up bids

Lauren Torres, an analyst with HSBC Securities (USA) Inc., said in a research note released Tuesday to Prospect News that Pepsi Bottling Group Inc. probably will negotiate for a higher price but will ultimately be acquired.

Purchase, N.Y.-based PepsiCo, which currently owns 33% of Pepsi Bottling Group and 43% of PepsiAmericas Inc., offered to buy the remaining shares of the companies on Monday.

The deal includes $14.75 in cash plus 0.283 of a share of PepsiCo for each share of Pepsi Bottling Group and $11.64 in cash plus 0.223 of a share of PepsiCo for each share of PepsiAmericas.

The cash-and-stock deal is valued at $29.50 per for share for Somers, N.Y.-based Pepsi Bottling Group and $23.27 per share for Minneapolis-based PepsiAmericas and represents a 17.1% premium to each bottler's stock closing price on Friday.

"We were somewhat surprised by the timing of this announcement as PepsiCo has been working closely with its bottlers to improve its volume growth, and strengthen its supply chain and go-to-market business model," Torres said. "It is important to note that the offers made for both Pepsi Bottling Group and PepsiAmericas are cross-conditional based on the successful completion of both transactions."

Another market source said Tuesday that PepsiCo is likely to increase the bids by 10% to seal the deal with both Pepsi Bottling Group and PepsiAmericas.

PepsiCo's plan also has upped the chances for Coca-Cola, which owns 35% of outstanding shares of Coca Cola Enterprises, to buy out its largest bottler, the source said.

However, the timing of a bid is uncertain as Coca-Cola might wait to see whether Pepsi is able to turn around its sales volumes in the United States after the consolidation," the source said.

PepsiCo and Coca-Cola spun off the bottling businesses about 10 years ago but now need them back, Torres said.

"Today, the environment has changed and in order to improve system dynamics, we believed there was an increasing likelihood that PepsiCo and now potentially Coca-Cola Co. will look to buy back these underperforming businesses," Torres said. "In our view, PepsiCo's actions may, to some extent, force Coca-Cola Co.'s hand to take similar action."

Pepsi Bottling Group shares fell 57 cents, or 1.85%, to close at $30.16, while shares of PepsiAmericas lost 50 cents, or 2.00%, to $24.54.

PepsiCo's stock dropped 51 cents, or 1.02%, to close at $49.35.

Shares of Atlanta-based Coca-Cola fell $1.24, or 2.80%, to close at $43.09 after the company reported a lower first-quarter profit on Tuesday.

Shares of Coca-Cola Enterprises, also of Atlanta, lost 50 cents, or 3.27%, to close at $14.77 on Tuesday.

Mentioned in this article:

Broadcom Corp. Nasdaq: BRCM

Coca-Cola Co. NYSE: KO

Coca-Cola Enterprises Inc. NYSE: CCE

Emulex Corp. NYSE: ELX

PepsiAmericas Inc. NYSE: PAS

Pepsi Bottling Group Inc. NYSE: PBG

PepsiCo, Inc. NYSE: PEP

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