Pepsi suit forecast to open talks; D&E buy expected to clear; DOJ: Regulatory shopping out

By Cristal Cody

Tupelo, Miss., May 11 - PepsiCo, Inc. took a hardball stance Monday and filed a lawsuit against Pepsi Bottling Group, Inc. over the bottler's handling of the rejection of a buyout offer.

The move may simply be a maneuver by PepsiCo to open discussions without raising the bid, an analyst told Prospect News on Monday.

In other deals, Little Rock, Ark.-based phone company Windstream Corp.'s plan to buy D&E Communications, Inc. for $159 million in stock and cash lacks any regulatory or shareholder issues, an analyst said in an interview.

Also on Monday, the Department of Justice promised more stringent antitrust reviews ahead. In particular, companies will not be able to go "shopping" to European regulators for merger clearance ahead of U.S. approval, said Christine Varney, who heads the department's antitrust division.

Meanwhile, stocks stumbled on Monday.

The Dow Jones Industrial Average slid 155.88 points, or 1.82%, to 8,418.77.

The Standard & Poor's 500 index lost 19.99 points, or 2.15%, to close at 909.24, and the Nasdaq Composite index fell 7.76 points, or 0.45%, to end at 1,731.24.

PepsiCo lawsuit

PepsiCo's lawsuit filed in Delaware alleges that Pepsi Bottling's directors intentionally failed to provide notice of a recent Pepsi Bottling board meeting to the directors affiliated with PepsiCo.

"At that meeting, the directors in attendance claim to have adopted a poison pill, implemented certain new executive compensation arrangements and purported to amend the PBG bylaws in ways PepsiCo believes are detrimental to its rights as a shareholder," PepsiCo said in a statement.

"Because of the lack of notice and consideration by the full board, PepsiCo alleges those actions by the board at the meeting are invalid."

PepsiCo also said the directors breached their fiduciary duties to shareholders by adopting the poison pill "because it restricts PepsiCo's rights as a PBG shareholder and constitutes an unreasonable and disproportionate response to PepsiCo's constructive proposal."

Somers, N.Y.-based Pepsi Bottling said in a statement sent to Prospect News that "PepsiCo has filed a lawsuit that is entirely without merit in an attempt to divert attention from its grossly inadequate proposal."

Both Pepsi Bottling and Minneapolis-based PepsiAmericas Inc. rejected PepsiCo's buyout offers last week.

PepsiCo has offered cash and stock valued at $29.50 per share for Pepsi Bottling and $23.27 per share for PepsiAmericas, which represents a 17% premium over the closing stock prices the day before the offers were announced on April 20.

PepsiCo is "just trying to take some action without having to raise the offer," an analyst told Prospect News on Monday.

"They're opening discussions with these comments, but they're not willing at this point to jump in with a higher offer," the analyst said. "Ultimately, that higher offer may still come, but there are some issues that seem to be outstanding that Pepsi needs to look into more before they put money on the table."

PepsiCo currently owns 33% of Pepsi Bottling and 43% of PepsiAmericas.

The $6 billion deal would give Purchase, N.Y.-based PepsiCo 80% of the distribution of its North American beverage volume.

Shares of Pepsi Bottling closed down 17 cents, or 0.53%, at $32.03, while PepsiAmericas' stock dropped 24 cents, or 0.94%, to $25.24 on Monday.

PepsiCo shares fell 17 cents, or 0.34%, to $49.58.

Windstream, D&E deal

Shares of D&E Communications gained $3.50, or 51.85%, to close Monday at $10.25. The stock has traded from $3.58 to $10.57 over the past year.

Under the buyout terms, D&E Communications shareholders will receive 0.65 of a share of Windstream stock and $5.00 in cash for each D&E share.

For the transaction, Windstream expects to pay $73 million in cash and provide 9.5 million shares of stock valued at $86 million, based on the company's closing stock price on Friday.

The total deal is valued at $330 million with the assumption of $171 million in debt from D&E.

Digital phone, internet and video provider Windstream, which has customers in 16 states, said Monday the acquisition of Ephrata, Pa.-based D&E Communications will provide an additional 44,000 high-speed internet customers.

Windstream said the deal must be approved by federal and state regulators and D&E Communications' shareholders.

The acquisition is expected to close in the second half of 2009.

Windstream spokesman David Avery told Prospect News on Monday that regulatory clearances will be needed from the Federal Communications Commission, the Justice Department and the Pennsylvania Public Utilities Commission.

Barry Sine, an analyst with Capstone Investments Inc., told Prospect News on Monday that the deal lacks any regulatory concerns.

"There's been a number of similar acquisitions in the State of Pennsylvania in the last couple of years and they've all gone through without any issues," he said. "Shareholders have been agitating for the company to put itself up for sale, so shareholders should be well pleased. This is a fair price."

Windstream shares fell 34 cents, or 3.76%, to close Monday at $8.71.

DOJ agenda

Varney announced the Justice Department's new antitrust agenda in a conference on Monday at the Washington think tank Center for American Progress.

During the meeting that was web cast live, Varney said she has heard that some companies go to European regulators first over concerns they will not receive approval for a merger from U.S. regulators.

"We want American businesses and European authorities to understand we stand ready to vigorously enforce our laws and discourage any company from shopping," she said. "I wouldn't expect you would get a better result from one jurisdiction or another."

Varney declined to comment on any specific companies, industries or cases but did say the division intends to be "very active in the cases that are moving through the courts now. When companies compete, you get better products at better prices."

Caroline Holland, chief counsel and staff director for the Senate Judiciary Committee's antitrust subcommittee, said at the conference that several bills will be introduced to increase competition across industries, including health care.

On Monday, leading health-care industry groups pledged to President Obama to help cut health-care costs over the next decade.

But the news is seen as a negative for drug retail companies, an analyst said Monday.

"While specifics were generally non-existent, the private sector's willingness to work alongside the government is a new development and likely paves the way for further legislation to be passed this year by Congress," the analyst said. "We believe government involvement will result in shrinking margins broadly across health care and specifically prescription drugs."

Mentioned in this article:

D&E Communications, Inc. Nasdaq: DECC

PepsiAmericas Inc. NYSE: PAS

Pepsi Bottling Group, Inc. NYSE: PBG

PepsiCo, Inc. NYSE: PEP

Windstream Corp. NYSE: WIN

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