April 20 (Bloomberg) -- PepsiCo Inc. offered to buy back the bottling operations it spun off a decade ago to regain control over soft-drink sales as soda volumes decline and non- carbonated beverages grow more popular.

The company was two years away from buying the maker of Gatorade, had just bought Tropicana and was increasing soft- drink volume when it spun off its soda distribution unit into Pepsi Bottling Group Inc. in 1999. Now the world’s second- largest soft-drink maker has offered about $6 billion in cash and stock to buy out other shareholders of its two biggest bottlers.

“If you were launching a strategic plan and saying, ‘How would you run a beverage business these days?’ it would be on a combined operating model because you need to have all the levers at your disposal,” PepsiCo Chief Financial Officer Richard Goodman said in a telephone interview. “The systems are not tuned to the realities of the marketplace today.”

PepsiCo is offering the equivalent of $29.50 per share for stock it doesn’t already own in its biggest bottler, Pepsi Bottling Group Inc., and $23.27 for PepsiAmericas Inc. shares. The offers are 17 percent higher than the bottlers’ April 17 closing prices, Purchase, New York-based PepsiCo said today.

The transactions would give PepsiCo full control over about 80 percent of its North American beverage market, where soft- drink profitability has shrunk as commodity prices rose and demand slowed. Cost elimination, increased purchasing power and new revenue streams resulting from the acquisitions should add at least $200 million to annual pretax profit, PepsiCo said.

‘Massive Move’

“The situation was bad enough that it required a massive move by PepsiCo,” Anthony Bucalo, an analyst at Credit Suisse Group AG in London, said in a note today. Credit Suisse has a “neutral” rating on the company’s shares.

Centerview Partners, Banc of America Securities and Merrill Lynch & Co. are advising PepsiCo, and Davis Polk & Wardwell is acting as legal counsel. Pepsi Bottling Group and PepsiAmericas both said today that they are reviewing the proposal.

PepsiCo and bigger rival Coca-Cola Co. sell beverage concentrate and syrup to licensed bottlers, which add water and other ingredients, put the mixture in bottles and cans and sell it. Since 2005, Coca-Cola has bought underperforming bottlers from Germany to the Philippines to “fix them up and spin them off,” Bucalo said.

Pepsi Bottling Group and other bottlers make most of PepsiCo’s soft drinks and bottled water, both of which are produced on so-called cold-fill manufacturing lines because the products don’t require heat to guard against bacteria and other harmful organisms. PepsiCo produces its own sports drinks and juices, which require “hot-fill” manufacturing lines to increase shelf life.

Non-Carbonated Growth

Many PepsiCo-manufactured drinks are sold to chain stores through a warehouse system. Bottlers deliver most of their products store by store. As non-carbonated drinks grew to 65 percent of the North American beverage market from 40 percent 10 years ago, PepsiCo found the split system more cumbersome to negotiate, executives said.

“There is a need to be more nimble, given the increasing role of non-carbonated drinks, retailer consolidation and the changing competitive landscape,” Chief Executive Officer Indra Nooyi said today on a conference call.

Goodman said PepsiCo wants the kind of flexibility it has with its Frito-Lay snacks unit, which both makes and distributes its products.

Carbonated soft drinks have also become less profitable, Goodman and Nooyi said. Instead of splitting a smaller pie with Pepsi Bottling and PepsiAmericas, PepsiCo can consolidate the earnings for its shareholders. The company also wants to be in better position to boost its share of a North American drinks industry it estimates will still grow 1 percent to 2 percent a year, Goodman said.

‘Major About-Face’

“Strategically, this represents a major about-face for PepsiCo and the entire beverage industry,” John Faucher, an analyst with J.P. Morgan Securities Inc. in New York, said today in a note.

Coca-Cola created its largest distributor, Coca-Cola Enterprises Inc., in 1986 to buy up smaller bottlers to get better control over distribution while limiting the amount of debt it would have to take on. PepsiCo’s move is unlikely to pressure Coca-Cola into buying Coca-Cola Enterprises because its distribution system is more complex, making consolidation more costly, Faucher said.

First-quarter earnings rose to 72 cents a share from 70 cents a year earlier, PepsiCo reported today, while reaffirming its full-year forecast of “mid- to high-single-digit constant- currency net sales and core earnings-per-share growth.” Buying the bottlers may boost profit by at least 15 cents a share once the cost benefits are fully realized, PepsiCo said.

Coca-Cola is scheduled to report earnings tomorrow.

Streamline

The proposed acquisitions will streamline manufacturing and distribution and shorten the time it takes to produce and market new products, the company said. PepsiCo spent $543 million last year to fire 3,500 employees and close plants as part of plans to save $1.2 billion over the next three years.

PepsiCo owns 33 percent of Pepsi Bottling and 43 percent of PepsiAmericas, according to data compiled by Bloomberg.

PepsiCo fell $2.27, or 4.4 percent, to $49.86 at 4:15 p.m. in New York Stock Exchange composite trading. Pepsi Bottling climbed $5.53, or 22 percent, to $30.73, and PepsiAmericas advanced 26 percent to $25.04.

The soda maker is offering $14.75 in cash and 0.283 of common stock for each share it doesn’t already own of Pepsi Bottling. The offer for PepsiAmericas is $11.64 in cash and 0.223 of common stock for each share.

To contact the reporters on this story: Duane D. Stanford in Atlanta at dstanford2@bloomberg.net; Andrew Cleary in London at acleary7@bloomberg.net.

Last Updated: April 20, 2009 16:38 EDT