Market waits on new PepsiCo bottler bids; DirecTV/Liberty combo expected to clear reviews

By Cristal Cody

Tupelo, Miss., May 4 - Pepsi Bottling Group Inc. on Monday rejected the buyout offer from PepsiCo, Inc. as inadequate, but analysts say that a consolidation still is the most likely scenario.

Also on Monday, DirecTV Group, Inc. said it expects to clear any regulatory hurdles in its merger with majority shareholder, Liberty Entertainment, Inc., after the division is spun off from Liberty Media Corp.

In other deals, Emulex Corp. said Monday it rejected a $764 million takeover bid from Broadcom Corp. and that the offer was made based mostly on the fact that Emulex recently won 12 manufacturer design contracts.

That could make Broadcom offer even more for Emulex, a market source told Prospect News.

Meanwhile, stocks held up on Monday, and the Dow Jones Industrial Average closed up 214.33 points, or 2.61%, at 8,426.74.

The Standard & Poor's 500 index gained 29.72 points, or 3.39%, to hit 907.24, while the Nasdaq Composite index added 44.36 points, or 2.58%, to close at 1,763.56.

Pepsi Bottling bottleneck

Pepsi Bottling also moved on Monday to protect the company and shareholders from "opportunistic acquisition attempts" by adopting a stockholder rights plan.

Purchase, N.Y.-based PepsiCo offered $6 billion in cash and stock on April 20 to acquire its two largest bottlers, Pepsi Bottling and Minneapolis-based PepsiAmericas Inc.

PepsiCo currently owns 33% of Somers, N.Y.-based Pepsi Bottling and 43% of PepsiAmericas.

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

PepsiCo and PepsiAmericas representatives were not immediately available for comment.

An analyst told Prospect News on Monday that the general market consensus of a second round of increased bids hasn't changed.

"It was highly speculated that both bottlers were going to look for an increased offer from PepsiCo," the analyst said. "We don't think the discussions are over."

Lauren Torres, an analyst with HSBC Securities (USA) Inc., said in a research note released Monday to Prospect News that the negotiations probably will carry on for several months.

"Similar to actions last week by PepsiCo's largest bottler Pepsi Bottling Group, PepsiCo's second largest bottler PepsiAmericas was able to deliver first quarter results that exceeded consensus and our expectations, and provide a more optimistic outlook for the remainder of the year," Torres said.

"We also believe that the terms of the deal will be negotiated, particularly in light of both Pepsi Bottling Group and PepsiAmericas delivering better than expected first quarter results, meeting or exceeding its cost savings objectives, and raising 2009 guidance," she said.

Pepsi Bottling shares rose 9 cents, or 0.29%, Monday to $31.50, while shares of PepsiAmericas added 7 cents, or 0.29%, to close at $24.49.

PepsiCo shares fell 69 cents, or 1.39%, to close at $49.10.

DirecTV, Liberty deal

Liberty Entertainment currently holds a 54% stake in El Segundo, Calif.-based DirecTV, one of the nation's leading digital television services.

Under Liberty Media's spinoff of Liberty Entertainment, the new company will hold the stakes in DirecTV, three regional sports networks and the Game Show Network and FUN Technologies.

DirecTV then will merge with the company to form a new parent company called DirecTV Group that will have two classes of stocks.

Englewood, Colo.-based Liberty is controlled by John Malone, who will receive 1.1111 shares of DirecTV class B stock for each share of Liberty Entertainment series B stock.

DirecTV holders will get one share of DirecTV class A common stock for each share of common stock they hold. Liberty Entertainment shareholders will get 1.11 shares for each Liberty Entertainment share they hold.

The spinoff and merger is expected to close in the fourth quarter.

The deal is subject to shareholder and regulatory approvals and clearance from the Internal Revenue Service on the merger's tax-free status, company executives said Monday on a conference call with analysts.

Chase Carey, DirecTV's chief executive officer, said on the call that regulatory clearance will be needed from the Federal Trade Commission and the Federal Communications Commission.

"We see no issues in getting the approvals," he said.

The deal includes a $450 million breakup fee, executives said on the call.

DirecTV shares fell 64 cents, or 2.60%, to close at $23.93, while Liberty Media's stock jumped 52 cents, or 9.40%, to $6.05 on Monday.

Emulex expects more

Costa Mesa, Calif.-based Emulex, which makes data networking storage products, said Broadcom's offer of $9.25 a share significantly undervalues the company.

Emulex noted in a letter sent to Broadcom on Monday that the April 21 offer is 37% below the company's 52-week high stock price of $14.74 a share.

In fact, that could be the price range Emulex is targeting, a market source said Monday.

Because Emulex cited the yearly stock high in the letter sent to Broadcom, "we think they may have used that 52-week high to present some perspective on what they thought was reasonable," the source told Prospect News.

Jim McCluney, president and CEO of Emulex, said in a statement that Broadcom is aware that "Emulex has recently won tier-one original equipment manufacturer contracts at the expense of Broadcom and our other competitors, and as such, we are well positioned to gain share in this rapidly growing segment."

Representatives of Irvine, Calif.-based Broadcom, which makes semiconductor chips for communications equipment, were not immediately available for a response.

But now, Emulex "may be worth a higher offer to Broadcom," the market source said.

"Broadcom is in a position where they're going to lose that business, so it makes sense for them to spend the money to buy Emulex," the source said. "We don't see other bidders entering the process at this point."

Shares of Emulex gained 38 cents, or 3.66%, to close Monday at $10.75.

Broadcom's stock closed up 88 cents, or 3.82%, at $23.94.

Mentioned in this article:

Broadcom Corp. Nasdaq: BRCM

DirecTV Group, Inc. Nasdaq: DTV

Emulex Corp. NYSE: ELX

Liberty Media Corp. Nasdaq: LINTA

PepsiAmericas Inc. NYSE: PAS

Pepsi Bottling Group Inc. NYSE: PBG

PepsiCo, Inc. NYSE: PEP

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