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Coke, P&G set juicy deal
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February 21, 2001: 2:45 p.m. ET
$4B venture will mix Pringles, Minute Maid, other snack and drink products
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NEW YORK (CNNfn) - Coca-Cola and Procter & Gamble plan to sell fruit drinks and snacks jointly through a $4 billion venture boasting such powerhouse brands as Sunny Delight, Minute Maid and Pringles, the companies said Wednesday.
The deal, which requires regulatory approval in the United States and Europe, provides P&G (PG: Research, Estimates) brands access to Coke's (KO: Research, Estimates) vast distribution network. A.G. Lafley, CEO of the Cincinnati-based consumer products maker, said the new deal would make Pringles snacks available in 10 times as many U.S. outlets.
 In turn, Coke gains access to P&G's rich research and development resources as the two companies focus developing global marketing and selling new juices, juice-based beverages and snacks.
However, the deal should especially benefit P&G, whose food unit has been a drag on the company's results in recent quarters.
The move comes as P&G's food sales have slumped and demand has grown for nutritious snacks and non-carbonated drinks. About 35 percent of salted snacks are consumed outside the home in the United States, the companies said, providing more opportunities for vending machines and other distribution possibilities, chiefly for Pringles.
Coca-Cola will contribute fruit-based drinks such as Minute Maid, Five-Alive and Fruitopia to the new firm, while Procter & Gamble will provide Sunny Delight and its Pringles snack unit.
The two firms will have 50-50 control over the joint venture, which has yet to be named. Annual revenue is expected to grow from $4 billion to more than $5 billion over the first two years from some 40 products and 15,000 employees.
During a conference call with analysts Wednesday, Coke veteran Don Short, who was tapped as the new company's CEO, said Pringles chips likely would be shipped to retailers on trucks alongside bottles of Coke, since both come in similar-sized containers and have roughly the same shelf life.
 However, some analysts expressed concern during the call about the new company's reliance on sales to drive profits rather than cost-cutting measures that would preserve gross margins.
"Honestly, our focus will be on the revenue side of this business," Short told analysts.
One analyst said the deal is a good one, at least for P&G, which believes it can successfully leverage Coke's beverage distribution system even though others have failed at similar arrangements in the past.
"At a minimum, you're trading off two brands that had been the source of a lot of headaches where over the last year they've been talking about problems with Pringles and Sunny Delight," said Sanford Bernstein analyst Jim Gingrich, who follows Procter & Gamble. "Without a doubt, Pringles today is an under-merchandised product that would benefit from greater distribution and more intense merchandising. The open question is, will moving it through the Coke system in fact deliver that? Clearly, if you look at history, there's been a mixed track record of people being able to move these types of products together with beverages."
During the conference call, analysts pointed out that Pepsi chose to distribute its Frito Lay snacks apart from its cola, and that a similar arrangement between Anheuser-Busch (BUD: Research, Estimates) and Eagle Snacks did not work out.
Coke under pressure
Coke's move comes shortly after it lost out to rival PepsiCo Inc. (PEP: Research, Estimates) in bidding for alternative drinks maker South Beach Beverage Co. Atlanta-based Coke also came under pressure after Pepsi's $13 billion planned acquisition of Quaker Oats, handing Pepsi top-selling sports drink Gatorade.
The new company is expected to be non-dilutive to both companies' earnings in the first year of operations and add to earnings in the second year and beyond, the companies said.
 A combination of Coke and P&G executives will run the new firm.
"This new company will focus all of its resources on becoming the global leader in innovative snacks and nutritional beverages," Lafley and Daft said in a joint statement Wednesday. "It multiplies our respective strengths, creating something better than either of our companies could do alone."
Short said the company would consider future acquisitions to help fuel growth, but for now he plans to focus on pumping up marketing and distribution of P&G juices and snacks through Coke's immense network, and establishing a set of brands for different countries rather than just one product in a particular country.
Coke's shares fell $3.67 to $54.80 in midday trading while P&G added $1.22 to $76.93.
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The new company also is expected to see pre-tax earnings grow about $200 million annually by 2005 from cost savings and revenue enhancements, the partners said.
In total, efficiency achieved through reduced manufacturing, distribution and administrative costs is expected to create $1.5 billion to $2 billion in increased value for shareholders of both companies.
Pringles revenue growth is expected to double through expanded distribution.
Talking about the new venture on CNNfn's Ahead of the Curve Wednesday, Coke CEO Douglas Daft, Lafley and Short, the Coke veteran tapped to be the new firm's CEO, all said they remain cautiously optimistic about the slowing economy and consumer spending, given the Federal Reserve's decision last month to twice lower interest rates.
"I think the U.S. economy is so strong, it is so well-managed, you have to look at it with a degree of realism, but with a degree of optimism as well," Daft said. "The goal is to make both companies do well in good times and in bad." 
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