UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Exhibit
99.1
On August
3, 2009, (i) PepsiCo, Inc. ("PepsiCo"), The Pepsi Bottling Group, Inc. ("PBG")
and PepsiCola Metropolitan Bottling Company ("Metro") entered into an Agreement
and Plan of Merger (the "PBG merger agreement") and (ii) PepsiCo, PepsiAmericas,
Inc. ("PAS") and Metro entered into an Agreement and Plan of Merger (the "PAS
merger agreement" and, together with the PBG merger agreement, the "merger
agreements"). Upon the terms and subject to the conditions of the PBG
merger agreement, PBG will be merged with and into Metro (the "PBG merger"),
with Metro continuing as the surviving corporation and a wholly owned subsidiary
of PepsiCo, and upon the terms and subject to the conditions of the PAS merger
agreement, PAS will be merged with and into Metro (the "PAS merger") with Metro
continuing as the surviving corporation and a wholly owned subsidiary of
PepsiCo. The PBG merger and the PAS merger are referred to collectively as
the “mergers.”
The
following unaudited pro forma condensed combined financial information has been
prepared to illustrate the effect of the mergers and has been prepared for
informational purposes only. The unaudited pro forma condensed
combined financial information is based upon the historical consolidated
financial statements and notes thereto of PepsiCo, PBG and PAS and should be
read in conjunction with the:
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·
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historical
financial statements and the accompanying notes of PepsiCo included in
PepsiCo’s Current Report on Form 8-K dated August 27, 2009, and Quarterly
Reports on Form 10-Q for the quarters ended March 21, 2009, June 13, 2009
and September 5, 2009;
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·
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historical
financial statements and the accompanying notes of PBG incorporated by
reference in this Current Report on Form 8-K;
and
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·
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historical
financial statements and the accompanying notes of PAS incorporated
by reference in this Current Report on Form
8-K.
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The
historical consolidated financial information has been adjusted in the unaudited
pro forma condensed combined financial statements to give effect to pro forma
events that are (1) directly attributable to the mergers, (2) factually
supportable, and (3) with respect to the statements of income, expected to have
a continuing impact on the combined results of PepsiCo, PBG and
PAS. Although PepsiCo has entered into the merger agreements, there
is no guarantee that the mergers will be completed. Accordingly, the
following unaudited pro forma condensed combined financial information depicts
the condensed combined balance sheet as of September 5, 2009 and the condensed
combined statements of income for the fiscal year ended December 27, 2008 and
the 36 weeks ended September 5, 2009, as if the mergers had
occurred. The unaudited pro forma condensed combined statements of
income have been prepared assuming the mergers had been completed on December
30, 2007, the first day of PepsiCo’s 2008 fiscal year. The unaudited
pro forma condensed combined balance sheet has been computed assuming the
mergers had been completed on September 5, 2009, the last day of PepsiCo’s 2009
fiscal third quarter. The unaudited pro forma condensed combined
financial information has been adjusted with respect to certain aspects of the
mergers to reflect:
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·
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the
consummation of the mergers;
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·
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the
elimination of related party transactions between PepsiCo and
PBG;
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·
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the
elimination of related party transactions between PepsiCo and
PAS;
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·
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changes
in assets and liabilities (as disclosed in more detail below) to record
their preliminary estimated fair values at the date of the closing of the
mergers and changes in certain expenses resulting therefrom;
and
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·
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additional
indebtedness, including, but not limited to, debt issuance costs and
interest expense, incurred in connection with the
mergers.
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1
The
unaudited pro forma condensed combined financial information was prepared in
accordance with the acquisition method of accounting under existing United
States generally accepted accounting principles, or GAAP standards, and the
regulations of the SEC, and is not necessarily indicative of the financial
position or results of operations that would have occurred if the mergers had
been completed on the dates indicated, nor is it indicative of the future
operating results or financial position of PBG, PAS and
PepsiCo. Assumptions and estimates underlying the pro forma
adjustments are described in the accompanying notes, which should be read in
connection with the unaudited pro forma condensed combined financial
information. The accounting for the mergers is dependent upon certain
valuations and other studies that have yet to commence or progress to a stage
where there is sufficient information for a definitive
measurement. Due to the fact that the unaudited pro forma condensed
combined financial information has been prepared based upon preliminary
estimates, the final amounts recorded for the mergers may differ materially from
the information presented. These estimates are subject to change
pending further review of the assets acquired and liabilities
assumed.
The
unaudited pro forma condensed combined statements of income exclude the impact
of PAS’ discontinued operations and do not reflect future events that may occur
after the mergers, including, but not limited to, the anticipated realization of
ongoing savings from operating synergies. It also does not give
effect to certain one-time charges PepsiCo expects to incur in connection with
the transaction, including, but not limited to, charges that are expected to
achieve ongoing cost savings and synergies. The mergers are
expected to create aggregate annual pre-tax synergies of $300 million by 2012
largely due to greater cost efficiency and also improved revenue
opportunities.
In
addition, the unaudited pro forma condensed combined statements of income
exclude an estimated gain resulting from remeasuring PepsiCo’s previously held
equity interests in PBG and PAS, and certain of their affiliates, from book
value to fair value. This estimated gain is reflected as a pro forma
adjustment to goodwill and retained earnings in the unaudited pro forma
condensed combined balance sheet. See “Note 11.”
2
PEPSICO,
INC. AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the
year ended December 27, 2008
(in
millions except per share amounts)
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PepsiCo
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PBG(2)
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PBG
Pro
Forma Adjustments
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Pro
Forma Combined PepsiCo and PBG
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PAS(2)
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PAS
Pro
Forma
Adjustments
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Pro
Forma Combined PepsiCo, PBG and PAS
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||||||||||||||||||||||||
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Net
Revenue
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$ | 43,251 | $ | 13,796 | $ | (2,939 | ) | (12) | $ | 54,108 | $ | 4,937 | $ | (1,037 | ) | (12) | $ | 58,008 | ||||||||||||
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Cost
of sales
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20,351 | 7,586 | (2,630 | ) | (11, 12) | 25,307 | 2,956 | (1,067 | ) | (11, 12) | 27,196 | |||||||||||||||||||
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Selling,
general and administrative expenses
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15,877 | 5,577 | (416 | ) | (4, 7, 9, 11, 12) | 21,038 | 1,509 | 16 | (7, 9, 11, 12) | 22,563 | ||||||||||||||||||||
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Amortization
of intangible assets
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64 | 9 | 44 | (5) | 117 | 7 | 14 | (5) | 138 | |||||||||||||||||||||
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Operating
Profit
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6,959 | 624 | 63 | 7,646 | 465 | - | 8,111 | |||||||||||||||||||||||
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Bottling
equity income
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374 | − | (222 | ) | (11) | 152 | − | (120 | ) | (11) | 32 | |||||||||||||||||||
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Interest
expense, net
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(288 | ) | (290 | ) | (10 | ) | (8) | (588 | ) | (111 | ) | (13 | ) | (8) | (712 | ) | ||||||||||||||
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Income
from continuing operations before income
taxes
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7,045 | 334 | (169 | ) | 7,210 | 354 | (133 | ) | 7,431 | |||||||||||||||||||||
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Provision
for income taxes
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1,879 | 112 | (59 | ) | 1,932 | 108 | (47 | ) | 1,993 | |||||||||||||||||||||
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Income
from continuing operations
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5,166 | 222 | (110 | ) | 5,278 | 246 | (86 | ) | 5,438 | |||||||||||||||||||||
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Less:
Net income attributable to noncontrolling interests
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24 | 60 | (59 | ) | (11) | 25 | 10 | (10 | ) | (11) | 25 | |||||||||||||||||||
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Income
from Continuing Operations Attributable
to PepsiCo/PBG/PAS
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$ | 5,142 | $ | 162 | $ | (51 | ) | $ | 5,253 | $ | 236 | $ | (76 | ) | $ | 5,413 | ||||||||||||||
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Income
from Continuing Operations Attributable
to PepsiCo/PBG/PAS per Common
Share
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Basic
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$ | 3.26 | $ | 0.75 | $ | 3.24 | $ | 1.88 | $ | 3.30 | ||||||||||||||||||||
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Diluted
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$ | 3.21 | $ | 0.74 | $ | 3.18 | $ | 1.85 | $ | 3.24 | ||||||||||||||||||||
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Weighted-Average
Common Shares
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Basic
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1,573 | 216 | 1,621 | 125 | 1,639 | |||||||||||||||||||||||||
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Diluted
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1,602 | 220 | 1,654 | 127 | 1,673 | |||||||||||||||||||||||||
See
“Notes to the Unaudited Pro Forma Condensed Combined Financial
Information.”
3
PEPSICO,
INC. AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the
36 weeks ended September 5, 2009
(in
millions except per share amounts)
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PepsiCo
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PBG(2)
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PBG
Pro
Forma Adjustments
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Pro
Forma Combined PepsiCo and PBG
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PAS(2)
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PAS
Pro
Forma
Adjustments
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Pro
Forma Combined PepsiCo, PBG and PAS
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Net
Revenue
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$ | 29,935 | $ | 9,414 | $ | (2,022 | ) | (12) | $ | 37,327 | $ | 3,453 | $ | (742 | ) | (12) | $ | 40,038 | ||||||||||||
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Cost
of sales
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13,806 | 5,245 | (1,758 | ) | (11, 12) | 17,293 | 2,053 | (742 | ) | (11, 12) | 18,604 | |||||||||||||||||||
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Selling,
general and administrative expenses
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10,077 | 3,296 | (299 | ) |
(2, 4, 7,
9, 11,
12)
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13,074 | 1,093 | - |
(2,
7, 9,
11,
12)
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14,167 | ||||||||||||||||||||
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Amortization
of intangible assets
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42 | 7 | 30 | (5) | 79 | 5 | 10 | (5) | 94 | |||||||||||||||||||||
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Operating
Profit
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6,010 | 866 | 5 | 6,881 | 302 | (10 | ) | 7,173 | ||||||||||||||||||||||
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Bottling
equity income
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290 | - | (222 | ) | (11) | 68 | - | (47 | ) | (11) | 21 | |||||||||||||||||||
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Interest
expense, net
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(241 | ) | (215 | ) | (7 | ) | (8) | (463 | ) | (75 | ) | (8 | ) | (8) | (546 | ) | ||||||||||||||
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Income
from continuing operations before income
taxes
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6,059 | 651 | (224 | ) | 6,486 | 227 | (65 | ) | 6,648 | |||||||||||||||||||||
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Provision
for income taxes
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1,517 | 45 | (78 | ) | 1,484 | 83 | (23 | ) | 1,544 | |||||||||||||||||||||
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Income
from continuing operations
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4,542 | 606 | (146 | ) | 5,002 | 144 | (42 | ) | 5,104 | |||||||||||||||||||||
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Less:
Net income/(loss) attributable to noncontrolling interests
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30 | 84 | (90 | ) | (11) | 24 | (3 | ) | 3 | (11) | 24 | |||||||||||||||||||
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Income
from Continuing Operations Attributable
to PepsiCo/PBG/PAS
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$ | 4,512 | $ | 522 | $ | (56 | ) | $ | 4,978 | $ | 147 | $ | (45 | ) | $ | 5,080 | ||||||||||||||
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Income
from Continuing Operations Attributable
to PepsiCo/PBG/PAS per Common
Share
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Basic
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$ | 2.90 | $ | 2.44 | $ | 3.10 | $ | 1.20 | $ | 3.13 | ||||||||||||||||||||
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Diluted
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$ | 2.87 | $ | 2.39 | $ | 3.06 | $ | 1.18 | $ | 3.09 | ||||||||||||||||||||
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Weighted-Average
Common Shares
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Basic
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1,557 | 214 | 1,604 | 122 | 1,623 | |||||||||||||||||||||||||
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Diluted
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1,573 | 219 | 1,626 | 124 | 1,645 | |||||||||||||||||||||||||
See
“Notes to the Unaudited Pro Forma Condensed Combined Financial
Information.”
4
PEPSICO,
INC. AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of
September 5, 2009
(in
millions)
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PepsiCo
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PBG(2)
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PBG
Pro
Forma Adjustments
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Pro
Forma Combined PepsiCo and PBG
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PAS(2)
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PAS
Pro
Forma
Adjustments
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Pro
Forma Combined PepsiCo, PBG and PAS
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Assets
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Current
Assets
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Cash
and cash equivalents
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$ | 3,254 | $ | 706 | $ | (111 | ) |
(2,4,8)
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$ | 3,849 | $ | 177 | $ | (66 | ) | (2,4,8) | $ | 3,960 | ||||||||||||
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Short-term
investments
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206 | - | - | 206 | - | - | 206 | |||||||||||||||||||||||
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Accounts
and notes receivable, net
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5,216 | 1,989 | (453 | ) | (12) | 6,752 | 475 | (59 | ) | (12) | 7,168 | |||||||||||||||||||
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Inventories
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2,716 | 667 | 230 | (6, 12) | 3,613 | 262 | 72 | (6, 12) | 3,947 | |||||||||||||||||||||
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Prepaid
expenses and other current assets
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1,024 | 310 | - | 1,334 | 129 | - | 1,463 | |||||||||||||||||||||||
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Total
Current Assets
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12,416 | 3,672 | (334 | ) | 15,754 | 1,043 | (53 | ) | 16,744 | |||||||||||||||||||||
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Property,
Plant and Equipment, net
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12,033 | 3,854 | 1,376 | (7) | 17,263 | 1,276 | 394 | (7) | 18,933 | |||||||||||||||||||||
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Amortizable
Intangible Assets, net
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843 | 94 | 1,646 | (5) | 2,583 | 47 | 697 | (5) | 3,327 | |||||||||||||||||||||
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Goodwill
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6,351 | 1,480 | 2,856 | (4) | 10,687 | 2,180 | (373 | ) | (4) | 12,494 | ||||||||||||||||||||
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Other
Nonamortizable Intangible Assets
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1,702 | 3,829 | 1,111 | (5) | 6,642 | 429 | 2,331 | (5) | 9,402 | |||||||||||||||||||||
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Nonamortizable
Intangible Assets
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8,053 | 5,309 | 3,967 | 17,329 | 2,609 | 1,958 | 21,896 | |||||||||||||||||||||||
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Investments
in Noncontrolled Affiliates
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4,339 | 597 | (2,427 | ) | (11) | 2,509 | - | (1,237 | ) | (11) | 1,272 | |||||||||||||||||||
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Other
Assets
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936 | 185 | (65 | ) | (8) | 1,056 | 218 | 6 | (8) | 1,280 | ||||||||||||||||||||
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Total
Assets
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$ | 38,620 | $ | 13,711 | $ | 4,163 | $ | 56,494 | $ | 5,193 | $ | 1,765 | $ | 63,452 | ||||||||||||||||
Continued
on next page.
5
PEPSICO,
INC. AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONDENSED COMBINED BALANCE SHEET (continued)
As of
September 5, 2009
(in
millions)
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PepsiCo
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PBG(2)
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PBG
Pro
Forma Adjustments
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Pro
Forma Combined PepsiCo and PBG
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PAS(2)
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PAS
Pro
Forma
Adjustments
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Pro
Forma Combined PepsiCo, PBG and PAS
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||||||||||||||||||||||||
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Liabilities
and Equity
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Current
Liabilities
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||||||||||||||||||||||||||||||
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Short-term
obligations
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$ | 511 | $ | 234 | $ | - | $ | 745 | $ | 279 | $ | - | $ | 1,024 | ||||||||||||||||
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Accounts
payable and other current
liabilities
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8,784 | 2,210 | (453 | ) | (12) | 10,541 | 532 | (59 | ) | (12) | 11,014 | |||||||||||||||||||
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Total
Current Liabilities
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9,295 | 2,444 | (453 | ) | 11,286 | 811 | (59 | ) | 12,038 | |||||||||||||||||||||
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Long-term
Debt Obligations
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7,434 | 5,472 | 3,154 | (8) | 16,060 | 2,006 | 1,183 | (8) | 19,249 | |||||||||||||||||||||
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Other
Liabilities
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5,713 | 1,429 | - | 7,142 | 249 | - | 7,391 | |||||||||||||||||||||||
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Deferred
Income Taxes
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347 | 1,074 | 1,424 | (10, 11) | 2,845 | 253 | 938 | (10, 11) | 4,036 | |||||||||||||||||||||
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Total
Liabilities
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22,789 | 10,419 | 4,125 | 37,333 | 3,319 | 2,062 | 42,714 | |||||||||||||||||||||||
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Preferred
Stock
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41 | - | - | 41 | - | - | 41 | |||||||||||||||||||||||
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Repurchased
Preferred Stock
|
(142 | ) | - | - | (142 | ) | - | - | (142 | ) | ||||||||||||||||||||
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PepsiCo/PBG/PAS
Common
Shareholders’
Equity
|
||||||||||||||||||||||||||||||
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Common
Stock and Capital in excess of par value
|
309 | 1,845 | 1,169 | (4,11) | 3,323 | 1,291 | (154 | ) | (4,11) | 4,460 | ||||||||||||||||||||
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Retained
earnings
|
33,077 | 3,537 | (3,113 | ) | (2,4,11) | 33,501 | 923 | (678 | ) | (2,4,11) | 33,746 | |||||||||||||||||||
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Accumulated
other comprehensive loss
|
(4,262 | ) | (812 | ) | 1,037 | (4,11) | (4,037 | ) | (190 | ) | 386 | (4,11) | (3,841 | ) | ||||||||||||||||
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Less: repurchased
common stock, at cost
|
(13,729 | ) | (2,543 | ) | 2,543 | (4) | (13,729 | ) | (349 | ) | 349 | (4) | (13,729 | ) | ||||||||||||||||
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Total
PepsiCo/PBG/PAS Common Shareholders’ Equity
|
15,395 | 2,027 | 1,636 | 19,058 | 1,675 | (97 | ) | 20,636 | ||||||||||||||||||||||
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Noncontrolling
Interests
|
537 | 1,265 | (1,598 | ) | (11) | 204 | 199 | (200 | ) | (11) | 203 | |||||||||||||||||||
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Total
Equity
|
15,831 | 3,292 | 38 | 19,161 | 1,874 | (297 | ) | 20,738 | ||||||||||||||||||||||
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Total
Liabilities and Equity
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$ | 38,620 | $ | 13,711 | $ | 4,163 | $ | 56,494 | $ | 5,193 | $ | 1,765 | $ | 63,452 | ||||||||||||||||
See
“Notes to the Unaudited Pro Forma Condensed Combined Financial
Information.”
6
PEPSICO,
INC. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
|
1)
|
Description
of Mergers
|
On August
3, 2009, PepsiCo entered into merger agreements with PBG and PAS to acquire all
of the outstanding shares of common stock it does not already own in its two
largest anchor bottlers. Under the agreements, PBG stockholders
(other than PepsiCo and its subsidiaries and any stockholders who properly
exercise and perfect their appraisal rights under Delaware law) will have the
right to receive either 0.6432 shares of PepsiCo common stock (the “PBG Per
Share Stock Consideration”) or, at their election, $36.50 in cash, without
interest (the “PBG Cash Election Price”), per share of PBG common stock, subject
to proration provisions which provide that an aggregate 50% of the shares of PBG
common stock outstanding immediately prior to the effective time of the PBG
merger not held by PepsiCo or any of its subsidiaries will be converted into the
right to receive PepsiCo common stock and an aggregate 50% of the shares of PBG
common stock outstanding immediately prior to the effective time of the PBG
merger not held by PepsiCo or any of its subsidiaries will be converted into the
right to receive cash. Similarly, PAS stockholders (other than
PepsiCo and its subsidiaries and any stockholders who properly exercise and
perfect their appraisal rights under Delaware law) will have the right to
receive either 0.5022 shares of PepsiCo common stock (the “PAS Per Share Stock
Consideration”) or, at their election, $28.50 in cash, without interest (the
“PAS Cash Election Price”), per share of PAS common stock, subject to proration
provisions which provide that an aggregate 50% of the shares of PAS common stock
outstanding immediately prior to the effective time of the PAS merger not held
by PepsiCo or any of its subsidiaries will be converted into the right to
receive PepsiCo common stock and an aggregate 50% of the shares of PAS common
stock outstanding immediately prior to the effective time of the PAS merger not
held by PepsiCo or any of its subsidiaries will be converted into the right to
receive cash.
Each PBG
or PAS stock option will be converted into an adjusted PepsiCo stock option to
acquire a number of shares of PepsiCo common stock, determined by multiplying
the number of shares of PBG or PAS common stock subject to the PBG or PAS stock
option by an exchange ratio (the “Closing Exchange Ratio”) equal to the closing
price of a share of PBG or PAS common stock on the business day immediately
before the mergers, as applicable, divided by the closing price of a share of
PepsiCo common stock on the business day immediately before the mergers, as
applicable. The exercise price per share of PepsiCo common stock
subject to the adjusted PepsiCo stock option will be equal to the per share
exercise price of PBG or PAS stock option divided by the Closing Exchange
Ratio. For purposes of the unaudited pro forma condensed combined
financial information at September 5, 2009, PBG’s outstanding stock options of
28.5 million are converted into 17.6 million PepsiCo stock options and PAS’
outstanding stock options of 1.1 million are converted into 0.5 million PepsiCo
stock options.
Each PBG
restricted stock unit (RSU) will be adjusted so that its holder will be entitled
to receive, upon settlement, a number of shares of PepsiCo common stock equal to
the number of shares of PBG common stock subject to the PBG RSU multiplied by
the PBG Per Share Stock Consideration. PBG performance-based RSUs
will be converted into PepsiCo RSUs based on 100% target achievement, and,
following conversion, will remain subject to continued service of the
holder. Each PBG RSU held by a non-employee director will vest and be
canceled at the PBG merger date, and, in exchange for cancellation of the PBG
RSU, the holder will receive the PBG Per Share Stock Consideration for each
share of PBG common stock subject to the PBG RSU. For purposes of the
unaudited pro forma condensed combined financial information at September 5,
2009, PBG’s outstanding 4.2 million of RSUs are converted into 2.7 million of
PepsiCo RSUs.
Each
cash-settled PAS RSU will be canceled in exchange for the PAS Cash Election
Price or fair market value (as
determined by PAS' management resources and compensation committee) on the date
of the change in control of a share of PAS common stock subject to each PAS RSU,
pursuant to the applicable plans and agreements. Each PAS
restricted share will be converted into either the PAS Per Share Stock
Consideration or the PAS Cash Election Price, at the election of the holder,
with the same proration procedures applicable to PAS stockholders described
above. At October 3, 2009, PAS had 0.4 million unvested RSUs and 3.2
million restricted shares.
7
Pursuant
to the terms of PBG’s executive retention arrangements, PBG equity awards
granted to certain executives prior to the PBG merger will vest immediately upon
a qualifying termination of the executive’s employment except for certain PBG
executive officers whose equity awards will vest immediately at the effective
time of the merger pursuant to the terms of PepsiCo’s executive retention
agreements. Each PAS equity award granted prior to August 4, 2009
will vest immediately at the effective time of the PAS merger pursuant to the
original terms of the awards.
The unaudited pro forma combined basic
and diluted income from continuing operations attributable to PepsiCo per common
share for the periods presented are based on the combined basic and diluted
weighted-average shares. The historical basic and diluted
weighted-average shares of PBG and PAS were assumed to be replaced by the
shares expected to be issued by PepsiCo to complete the mergers, as
applicable. The impact to the weighted-average common shares
based on the issuance of PepsiCo stock as part of consideration in the mergers,
as well as the net issuance of PepsiCo stock options and restricted stock units
in exchange for PBG and PAS stock options and restricted stock units, is
reflected in the unaudited pro forma condensed combined financial information
using the treasury stock method.
Neither
merger is subject to financing contingencies, but each is subject to customary
approvals, including receipt of the necessary regulatory consents and approvals
and adoption of the applicable merger agreement by stockholders of PBG and PAS,
as applicable. As of the date of this Form 8-K, the mergers are
expected to be completed by the end of the first quarter of 2010.
|
2)
|
Basis
of Presentation
|
The
mergers are reflected in the unaudited pro forma condensed combined financial
information as being accounted for under the acquisition method in accordance
with Statement of Financial Accounting Standards (SFAS) No. 141 (revised
2007), Business
Combinations (SFAS 141R). Under the acquisition method, the
total estimated purchase price is calculated as described in Note 4 to the
unaudited pro forma condensed combined financial information. In
accordance with SFAS 141R, the assets acquired and the liabilities assumed
have been measured at fair value based on various preliminary
estimates. These estimates are based on key assumptions of the
mergers, including prior acquisition experience, benchmarking of similar
acquisitions and historical data. Due to the fact that the unaudited
pro forma condensed combined financial information has been prepared based on
preliminary estimates, the final amounts recorded for the mergers may differ
materially from the information presented. These estimates are
subject to change pending further review of the fair value of assets acquired
and liabilities assumed. In addition, the final determination of the
recognition and measurement of the identified assets acquired and liabilities
assumed will be based on an estimate of the fair market value of actual net
tangible and intangible assets and liabilities of PBG and PAS at the closing
date of the mergers, as applicable.
Under
SFAS 141R, acquisition-related transaction costs and acquisition-related
restructuring charges are not included as components of consideration
transferred but are accounted for as expenses in the period in which the costs
are incurred. Total merger-related transaction costs expected to be
incurred by PepsiCo are approximately $126 million ($92 million related to PBG
and $34 million related to PAS). Of the $126 million of total costs,
$1 million has been paid through September 5, 2009 and has been removed from the
unaudited pro forma condensed combined statement of income as they reflect
non-recurring charges directly related to the mergers. The remaining
$125 million ($91 million related to PBG and $34 million related to PAS) of
anticipated costs are reflected in the unaudited pro forma condensed combined
balance sheet as a reduction of cash and retained
earnings. Similarly, merger-related transaction costs of $37 million
incurred by PBG through September 5, 2009 and merger-related transaction costs
of $4 million incurred by PAS through October 3, 2009 have been removed from the
unaudited pro forma condensed combined statement of income.
The
unaudited pro forma condensed combined financial information does not reflect
ongoing cost savings that PepsiCo expects to achieve as a result of the mergers
or the costs necessary to achieve these costs savings or
synergies. The mergers are expected to create aggregate annual
pre-tax synergies of $300 million by 2012 largely due to greater cost efficiency
and also improved revenue opportunities.
For
purposes of measuring the estimated fair value, where applicable, of the assets
acquired and the liabilities assumed as reflected in the unaudited pro forma
condensed combined financial information, PepsiCo has applied the guidance in
SFAS No. 157, Fair Value
Measurements (SFAS 157) which establishes a framework for measuring fair
value. In accordance with SFAS 157, fair value is an exit price and
is defined as "the price
8
that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date."
The
historical balance sheets of both PepsiCo and PBG used to create the unaudited
pro forma condensed combined balance sheet is as of September 5, 2009, the last
day of PepsiCo’s and PBG’s third fiscal quarter. PepsiCo’s and PBG’s
results are based on a fiscal year that ends on the last Saturday of each
December. The historical statements of income of PepsiCo and PBG used
to create the unaudited pro forma condensed combined statements of income are
for the fiscal year ended December 27, 2008 and for the 36 weeks ended September
5, 2009.
The
historical balance sheet of PAS used to create the unaudited pro forma condensed
combined balance sheet is as of October 3, 2009, the last day of PAS’ third
fiscal quarter. PAS’ results are based on a fiscal year that consists
of 52 or 53 weeks ending on the Saturday closest to December 31. The historical statements of
income of PAS used to create the unaudited pro forma condensed combined
statements of income are for the fiscal year ended January 3, 2009 and first
nine months ended October 3, 2009. While PAS’ reporting calendar
differs from PepsiCo’s and PBG’s, the impact of these calendar differences is
not material to the unaudited pro forma condensed combined financial
information.
Certain
reclassifications have been made to the historical presentation of PBG and PAS
to conform to the presentation used in the unaudited pro forma condensed
combined statements of income. Upon consummation of the
mergers, further review of PBG’s and PAS’ financial statements may result in
required revisions to PBG’s and PAS’ classifications to conform to
PepsiCo’s. PepsiCo does not expect that any such revisions would be
material.
Tabular
dollars are presented in millions, except per share amounts.
|
3)
|
Significant
Accounting Policies
|
Based
upon PepsiCo’s review of PBG’s and PAS’ summary of significant accounting
policies disclosed in PBG’s and PAS’ financial statements and preliminary
discussions with PBG and PAS management, the nature and amount of any
adjustments to the historical financial statements of PBG and PAS to conform
their accounting policies to those of PepsiCo are not expected to be
material. Upon consummation of the mergers, further review of PBG’s
and PAS’ accounting policies and financial statements may result in required
revisions to PBG’s and PAS’ policies and classifications to conform to
PepsiCo’s.
9
|
4)
|
Estimated
Purchase Price and Resulting Adjustment to
Goodwill
|
The
computation of the estimated purchase price, excess of purchase price over the
net tangible book value of net assets acquired and the resulting net adjustment
to goodwill as of September 5, 2009 are as follows:
|
PBG
|
PAS
|
PBG
+ PAS
|
|||||||||||||||||||||
|
Number
of Shares/Awards
Issued
|
Total
Estimated
Fair
Value
|
Number
of
Shares/
Awards
Issued
|
Total
Estimated
Fair
Value
|
Total
Estimated
Fair
Value
|
|||||||||||||||||||
|
Payment
in cash, for the remaining (not owned
by PepsiCo) outstanding shares of
PBG and PAS common stock and equity
awards vested at consummation of
mergers (Note 1)
|
− | $ | 2,686 | − | $ | 1,062 |
(a)
|
$ | 3,748 |
(a)
|
|||||||||||||
|
Payment
to PBG and PAS of shares of PepsiCo common stock for the remaining (not
owned by PepsiCo) outstanding shares of PBG and PAS common stock and
equity awards vested at consummation of mergers (see Note
1)
|
47 | 2,868 | 19 | 1,122 |
(b)
|
3,990 |
(b)
|
||||||||||||||||
|
Issuance
of PepsiCo equity awards to replace existing PBG and PAS equity awards
(Note 1)
|
20 | 288 |
(c)
|
1 | 15 | 303 |
(c)
|
||||||||||||||||
|
Total
estimated purchase price
|
67 | $ | 5,842 | 20 | $ | 2,199 | $ | 8,041 | |||||||||||||||
|
Net
book value of net assets
|
$ | 3,292 | $ | 1,874 | $ | 5,166 | |||||||||||||||||
|
Less:
PepsiCo equity investments in PBG and PAS
|
(2,163 | ) | (1,168 | ) | (3,331 | ) | |||||||||||||||||
|
Less:
Surviving postcombination noncontrolling interests
|
(26 | ) | 1 | (25 | ) | ||||||||||||||||||
|
Less:
Elimination of profit in inventory
(Note 12)
|
(186 | ) | (65 | ) | (251 | ) | |||||||||||||||||
|
Less:
Transaction costs to be incurred by acquiree
|
(6 | ) | (26 | ) | (32 | ) | |||||||||||||||||
|
Net
book value of net assets acquired
|
911 | 616 | 1,527 | ||||||||||||||||||||
|
Less:
Goodwill acquired
|
(1,480 | ) | (2,180 | ) | (3,660 | ) | |||||||||||||||||
|
Less:
Intangible assets acquired (Note 5)
|
(3,923 | ) | (476 | ) | (4,399 | ) | |||||||||||||||||
|
Net
tangible book value of net assets acquired
|
(4,492 | ) | (2,040 | ) | (6,532 | ) | |||||||||||||||||
|
Estimated
purchase price less net tangible book value of net assets
acquired
|
10,334 | 4,239 | 14,573 | ||||||||||||||||||||
|
Adjustments
to goodwill related to:
|
|||||||||||||||||||||||
|
Identifiable
intangible assets (Note
5)
|
(6,680 | ) | (3,504 | ) | (10,184 | ) | |||||||||||||||||
|
Inventory
(Note 6)
|
(416 | ) | (137 | ) | (553 | ) | |||||||||||||||||
|
Property,
plant and equipment (Note
7)
|
(1,376 | ) | (394 | ) | (1,770 | ) | |||||||||||||||||
|
Debt
obligations (Note 8)
|
564 | 121 | 685 | ||||||||||||||||||||
|
Deferred
income taxes (Note 10)
|
1,395 | 1,203 | 2,598 | ||||||||||||||||||||
|
Gain
in investments in noncontrolled affiliates
(Note 11)
|
515 | 279 | 794 | ||||||||||||||||||||
|
Total
adjustments
|
(5,998 | ) | (2,432 | ) | (8,430 | ) | |||||||||||||||||
|
Gross
adjustment to goodwill
|
4,336 | 1,807 | 6,143 | ||||||||||||||||||||
|
Less:
Goodwill acquired
|
(1,480 | ) | (2,180 | ) | (3,660 | ) | |||||||||||||||||
|
Net
adjustment to goodwill
|
$ | 2,856 | $ | (373 | ) | $ | 2,483 | ||||||||||||||||
|
(a)
|
Includes
$57 million of PAS equity awards for which vesting accelerates upon
consummation of the PAS merger.
|
|
(b)
|
Includes
$49 million of PAS equity awards for which vesting accelerates upon
consummation of the PAS merger.
|
|
(c)
|
Excludes
$135 million (pre-tax) of unvested PBG equity awards to be recognized in
PepsiCo’s postcombination financial statements over the remaining lives of
the awards, approximately 2 years. Incremental compensation
expense of $33 million and $23 million have been included as an adjustment
within selling, general and administrative expenses to the unaudited pro
forma condensed combined statements of income for the fiscal year ended
December 27, 2008 and the 36 weeks ended September 5, 2009,
respectively.
|
10
PepsiCo's
actual stock price at the date that each of the mergers, as applicable, is
completed will be used to determine the value of stock, stock options and
restricted stock units to be issued as consideration in connection with the
mergers, as applicable, and thus to calculate the actual purchase
price. In calculating the estimated purchase price, PepsiCo’s stock
price as of December 22, 2009 was used as a proxy for the actual PepsiCo stock
price as of the date the mergers are completed. Changes in PepsiCo's
stock price between December 22, 2009 and the date the mergers are completed may
result in a material difference from the stock price used to calculate the
estimated purchase price for the purposes of the unaudited pro forma condensed
combined financial information. If PepsiCo’s stock price as of the
date the mergers are completed increases or decreases by 36% from the price
assumed in the unaudited pro forma condensed combined financial information, the
consideration transferred would increase or decrease by approximately $1.6
billion, which would be reflected as an increase or decrease to
goodwill. PepsiCo believes that an increase or decrease by as
much as 36% in the PepsiCo common stock price on the consummation of the mergers
from the common stock price assumed in the unaudited pro forma condensed
combined financial information is reasonably possible based upon fluctuations in
PepsiCo’s common stock price since the announcement date of the proposed
mergers.
Each PBG
or PAS share award will be converted as described in Note 1 “Description of
Mergers.” SFAS 141R requires that the fair value of replacement awards and cash
payments made to settle vested awards attributed to precombination service be
included in the consideration transferred. The fair value of PBG or
PAS share awards which will immediately vest at the effective date of the
mergers, as applicable, has been attributed to precombination service and
included in the consideration transferred. For unvested PBG share
awards converted at the effective date of the PBG merger, the fair value of the
awards attributable to precombination services is included as part of
consideration transferred and the fair value attributable to postcombination
services will be recorded as compensation expense in the postcombination
financial statements of the combined entity.
For the
purpose of preparing the unaudited pro forma condensed combined financial
information, the assets acquired and liabilities to be assumed in the mergers
have been measured at their estimated fair values as of September 5, 2009 and
October 3, 2009 for PBG and PAS, respectively. A final determination
of the fair values of the assets acquired and liabilities to be assumed in the
mergers will be made based on facts and circumstances on the closing
date. Accordingly, the fair value of the assets and liabilities
included in the table above are preliminary and subject to change. An
increase (or decrease) in the fair value of inventory, property, plant and
equipment or any identifiable intangible assets will reduce (or increase) the
amount of goodwill in the unaudited pro forma condensed combined financial
information and may result in increased (or decreased) expense.
In
connection with the consummation of the mergers, the following historical common
shareholders’ equity balances as of September 5, 2009 and October 3, 2009 for
PBG and PAS, respectively, are eliminated in the unaudited pro forma condensed
combined balance sheet as of September 5, 2009, as follows:
|
PBG
|
PAS
|
|||||||
|
Common
stock and capital in excess of par value
|
$ | 1,845 | $ | 1,291 | ||||
|
Repurchased
common stock
|
$ | (2,543 | ) | $ | (349 | ) | ||
|
Retained
earnings
|
$ | 3,537 | $ | 923 | ||||
|
Accumulated
other comprehensive loss(a)
|
$ | (812 | ) | $ | (190 | ) | ||
|
(a)
|
Includes
pension- and postretirement-related accumulated other comprehensive loss
separately identified in Note 9.
|
|
5)
|
Intangible
Assets
|
For
purposes of estimating the fair value of the assets to be acquired in the
mergers, it is assumed that all assets will be used in a manner that represents
their highest and best use. The favorable impact of buyer-specific
synergies expected to be incurred upon consummation of the mergers are
excluded. The estimated fair values of the most significant acquired
intangible assets are based on the amount and timing of projected future cash
flows associated with the assets.
11
The
preliminary estimates of fair values and weighted-average useful lives of the
intangible assets will likely differ from the final estimates of fair value to
be reflected in accounting for the mergers, and the difference could have a
material impact on the accompanying unaudited pro forma condensed combined
financial information. The estimates of fair value and
weighted-average useful lives could be impacted by a variety of factors
including legal, regulatory, contractual, competitive, economic or other
factors. Increased knowledge about these factors upon consummation of
the mergers could result in a change to the estimated fair value of PBG’s and
PAS’ intangible assets and/or to the estimated weighted-average useful lives
from what is assumed in the unaudited pro forma condensed combined financial
information. In addition, the combined effect of any such changes
could result in a significant increase or decrease to the related amortization
expense estimates.
Nonamortizable
In
connection with the mergers, PepsiCo will reacquire certain franchise rights
which provide PBG and PAS with the exclusive and perpetual rights to manufacture
and/or distribute beverages for sale in specified territories. A
preliminary fair value estimate pertaining to reacquired franchise rights is
noted in the table below. PepsiCo management took many factors into
consideration in determining the life of certain reacquired franchise rights,
including the existing perpetual bottling arrangements, the indefinite period
expected for the reacquired rights to contribute to PepsiCo’s future cash flows,
as well as the lack of any factors that would limit the useful life of the
reacquired rights to PepsiCo, including legal, regulatory, contractual,
competitive, economic or other factors. Therefore, in accordance with
SFAS No. 142, Goodwill
and Other Intangible Assets (SFAS 142), certain reacquired franchise
rights will not be amortized, but instead will be tested for impairment at least
annually.
Consistent
with the guidance in SFAS 141R, the fair value of PBG’s and PAS’ assembled
workforce and buyer-specific synergies has been included in
goodwill.
On
December 7, 2009, PepsiCo reached an agreement with Xx Xxxxxx Snapple Group,
Inc. (“DPSG”) to manufacture and distribute Xx Xxxxxx and certain other
DPSG products in the territories where they are currently sold by PBG and PAS.
Under the terms of the agreement, DPSG will receive an upfront payment of $900
million payable upon closing of the mergers. Based upon the terms of the
agreement and the guidance in SFAS 142, the contract has been deemed perpetual
for accounting purposes and will not be amortized, but instead will be tested
for impairment at least annually. The unaudited pro forma condensed combined
financial information includes the results attributable to the original contract
since it has been part of the existing operations of PBG and PAS. However, the
unaudited pro forma condensed combined financial information does not reflect
the additional upfront payment, nor any related financing costs,
as this agreement is independent of the mergers.
Amortizable
Certain
reacquired and acquired franchise rights are amortizable over the remaining
contractual period of the contract in which the right was
granted. Preliminary fair value estimates for both definite-lived
reacquired and acquired franchise rights and other amortizable intangible assets
acquired, primarily consisting of customer relationships, are noted in the table
below. Amortization related to the fair value of amortizable
intangible assets is reflected as an adjustment to the unaudited pro forma
condensed combined statements of income. The determination of the
useful lives was based upon an evaluation of a number of factors, including
contractual arrangements, market share, consumer awareness, historical
acquisition experience and economic factors pertaining to the combined
company.
12
|
PBG
|
|||||||||||||
|
Estimated
Fair Value
|
Weighted-Average Estimated
Useful
Life
|
Amortization
Expense
(52
Weeks)
|
Amortization
Expense
(36
weeks)
|
||||||||||
|
Reacquired
franchise rights – indefinite-lived
|
$ | 4,900 |
Perpetual
|
||||||||||
|
Other
– indefinite-lived
|
40 |
Perpetual
|
|||||||||||
|
Acquired
franchise rights – definite-lived
|
1,440 |
55
years
|
$ | 38 | $ | 27 | |||||||
|
Other
identified intangible assets – definite-lived
|
300 |
20
years
|
15 | 10 | |||||||||
|
Total
intangible assets acquired
|
$ | 6,680 | $ | 53 | $ | 37 | |||||||
|
Less:
PBG’s historical intangible assets and amortization
|
(3,923 | ) | (9 | ) | (7 | ) | |||||||
|
Pro
forma adjustments
|
$ | 2,757 | $ | 44 | $ | 30 | |||||||
|
PAS
|
|||||||||||||
|
Estimated
Fair Value
|
Weighted-Average Estimated
Useful
Life
|
Amortization
Expense
(52
Weeks)
|
Amortization
Expense
(36
weeks)
|
||||||||||
|
Reacquired
franchise rights – indefinite-lived
|
$ | 2,700 |
Perpetual
|
||||||||||
|
Other
– indefinite-lived
|
60 |
Perpetual
|
|||||||||||
|
Acquired
franchise rights – definite-lived
|
644 |
55
years
|
$ | 16 | $ | 12 | |||||||
|
Other
identified intangible assets – definite-lived
|
100 |
20
years
|
5 | 3 | |||||||||
|
Total
intangible assets acquired
|
$ | 3,504 | $ | 21 | $ | 15 | |||||||
|
Less:
PAS’ historical intangible assets and amortization
|
(476 | ) | (7 | ) | (5 | ) | |||||||
|
Pro
forma adjustments
|
$ | 3,028 | $ | 14 | $ | 10 | |||||||
|
6)
|
Inventories
|
Reflects
an increase of $416 million and $137 million to record PBG’s and PAS’ inventory,
respectively, at its estimated net realizable value. PepsiCo’s pro
forma fair value adjustment to inventory is based on PBG’s and PAS’ inventory as
of September 5, 2009 and October 3, 2009, respectively. PepsiCo
believes that the fair value of inventory approximates net realizable value,
which is defined as expected sales price less cost to sell plus a reasonable
margin for selling effort. In addition, as PepsiCo sells the acquired
inventory, its cost of sales will reflect the increased valuation of PBG’s and
PAS’ inventory, which will temporarily reduce PepsiCo’s gross
margin. This adjustment to gross margin is considered a non-recurring
adjustment and as such is not included in the unaudited pro forma condensed
combined statements of income.
|
7)
|
Property,
Plant and Equipment
|
Reflects
an increase of $1.4 billion and $0.4 billion to record PBG’s and PAS’ property,
plant and equipment, respectively, at their respective estimated fair
values. PepsiCo believes these amounts represent the best current
estimates of fair value. The fair value of PBG’s and PAS’ property,
plant, and equipment was estimated using the replacement cost
method. Under the replacement cost method, fair value is estimated to
be the amount a market participant would pay to replace the
asset. The estimate is preliminary, subject to change and could vary
materially from the actual adjustment at the time of consummation of the
mergers. For each $100 million increase in fair value
adjustment to property, plant and equipment, PepsiCo would expect an annual
increase in depreciation expense approximating $9 million, assuming a
weighted-average life of approximately 11 years.
13
Reflects
a decrease in depreciation expense of $120 million and $7 million for PBG and
PAS, respectively, for the fiscal year ended December 27, 2008 based on the fair
value adjustments to the book values of PBG’s and PAS’ property, plant and
equipment, offset by an extension of their respective historical useful
lives. In addition, the unaudited pro forma condensed combined
statement of income for the 36 weeks ended September 5, 2009 reflects a decrease
in depreciation expense of $55 million and $3 million for PBG and PAS,
respectively.
|
8)
|
Debt-Obligations
and Commitments
|
In
connection with the merger agreements, PepsiCo intends to issue approximately $4
billion of senior unsecured fixed rate notes (the “senior unsecured notes”),
with maturity tranches ranging from 2 to 30 years and interest rates ranging
from 1.25%-5.40%. The pro forma adjustments in the table below
assume PepsiCo issues debt, at a weighted-average interest rate of 3.95%, to
fund a portion of the merger consideration for PBG, PAS, or both PBG and
PAS.
The
senior unsecured notes have been allocated between PBG and PAS based upon the
respective cash portions of the purchase price attributable to each of the
mergers. The ultimate amount of senior secured notes issued will
reflect the actual amount of cash required.
The
interest rates on the senior unsecured notes are not reflective of the borrowing
rates applicable to any additional financing debt that PepsiCo may
incur. Higher interest rates associated with the senior unsecured
notes and commercial paper could occur if PepsiCo’s credit rating is downgraded,
interest rates change or credit markets deteriorate. Actual
interest rates for the senior unsecured notes may vary from the assumed
rate. The effect of a 0.125% change in interest rates would result in
a $5 million change in annual interest expense on a pre-tax basis.
Global
capital and credit markets, including the commercial paper markets, continue to
experience volatility. Despite this volatility, PepsiCo continues to
have sufficient access to the capital and credit markets. In
addition, PepsiCo has revolving credit facilities. PepsiCo believes
that its cash generating capability and financial condition, together with its
revolving credit facilities and other available methods of debt financing
(including long-term debt financing which, depending upon market conditions,
PepsiCo intends to use to replace a portion of its commercial paper borrowings),
will be adequate to meet its operating, investing and financing
needs. However, there can be no assurance that continued or increased
volatility in the global capital and credit markets will not impair its ability
to access these markets on terms commercially acceptable to PepsiCo or at
all.
14
The
following table depicts the effect of the debt expected to be issued in
connection with the mergers and the effect of the estimated increase in fair
value of PBG’s and PAS’ historical debt.
|
Principal
|
Weighted-
Average Interest
Rate
|
Weighted-Average
Term
of Debt
|
Interest
Expense
(52
weeks)
|
Interest
Expense
(36
weeks)
|
|||||||||||||
|
PBG:
|
|||||||||||||||||
|
Senior
unsecured notes
|
$ | 2,686 | 3.95 | % |
2-30
years
|
$ | 106 | $ | 73 | ||||||||
|
Financing
costs associated with the issuance of the
senior unsecured notes (a)
|
1 | 1 | |||||||||||||||
|
Elimination
of JSC Xxxxxxxxxxx
(Xxxxxxxxxxx)
debt (b)
|
(79 | ) | − | − | |||||||||||||
|
Elimination
of note payable to PR Beverages
|
(17 | ) | − | − | |||||||||||||
|
Increase
in fair value of PBG's debt (c)
|
564 | (97 | ) | (67 | ) | ||||||||||||
|
Total
pro forma adjustments
|
$ | 3,154 | $ | 10 | $ | 7 | |||||||||||
|
PAS:
|
|||||||||||||||||
|
Senior
unsecured notes
|
$ | 1,062 | 3.95 | % |
2-30
years
|
$ | 42 | $ | 29 | ||||||||
|
Financing
costs associated with the issuance of the
senior unsecured notes (a)
|
1 | − | |||||||||||||||
|
Increase
in fair value of PAS’ debt (c)
|
121 | (30 | ) | (21 | ) | ||||||||||||
|
Total
pro forma adjustments
|
$ | 1,183 | $ | 13 | $ | 8 | |||||||||||
|
PBG
and PAS:
|
|||||||||||||||||
|
Senior
unsecured notes
|
$ | 3,748 | 3.95 | % |
2-30
years
|
$ | 148 | $ | 102 | ||||||||
|
Financing
costs associated with the issuance of the
senior unsecured notes (a)
|
2 | 1 | |||||||||||||||
|
Elimination
of Xxxxxxxxxxx debt (b)
|
(79 | ) | − | − | |||||||||||||
|
Elimination
of note payable to PR Beverages
|
(17 | ) | − | − | |||||||||||||
|
Increase
in fair value of PBG's and PAS’ debt (c)
|
685 | (127 | ) | (88 | ) | ||||||||||||
|
Total
pro forma adjustments
|
$ | 4,337 | $ | 23 | $ | 15 | |||||||||||
|
|
a)
|
The
fees associated with the issuance of the senior unsecured notes of $20
million ($14 million pertaining to PBG and $6 million pertaining to PAS)
are reflected as a decrease to cash and an increase to deferred debt
issuance costs, which is a component of other
assets.
|
|
|
b)
|
During
the first quarter of 2009, PBG issued a xxxxx-denominated three-year note
with an interest rate of 10% to Lebedyansky. This receivable
was reflected in PBG’s other
assets.
|
|
|
c)
|
As
of the closing date of the mergers, debt is required to be remeasured at
fair value. Based on publicly-quoted market prices, the
estimated fair value of PBG’s long-term debt as of September 5, 2009 was
$6.1 billion and the estimated fair value of PAS’ long-term debt as of
October 3, 2009 was $2.1 billion. The related reduction in
interest expense pertains to the amortization of these fair value
adjustments over the estimated remaining lives of such
debt. The effect of a 0.125% change in interest rates would
result in a $5 million and $2 million change in the related pro forma
annual interest expense for PBG and PAS,
respectively.
|
15
|
9)
|
Pension
and Postretirement Benefits
|
As of the
closing date of the mergers, the pension and postretirement liabilities of such
plans are required to be recorded at funded status, with the previously
unrecognized prior service cost and unrealized gains/losses eliminated from
equity. The adjustment reflects the elimination of the unamortized prior
service cost and unamortized actuarial loss of $543 million related to PBG’s
pension and postretirement plans and $64 million related to PAS’ pension and
postretirement plans. Additionally,
related pro forma adjustments to selling, general and administrative expenses to
exclude amounts previously amortized on PBG’s and PAS’ historical statements of
income are as follows:
|
PBG
|
PAS
|
|||||||||||||||
|
52
Weeks
|
36
weeks
|
52
Weeks
|
36
weeks
|
|||||||||||||
|
Amortization
of prior service cost
|
$ | (7 | ) | $ | (5 | ) | $ | − | $ | − | ||||||
|
Recognized
actuarial loss
|
(18 | ) | (25 | ) | − | (3 | ) | |||||||||
| $ | (25 | ) | $ | (30 | ) | $ | − | $ | (3 | ) | ||||||
|
10)
|
Income
Taxes
|
Represents
the estimated deferred income tax liability to be recorded by PepsiCo as part of
the accounting for the mergers, based on the United States federal statutory tax
rate of 35% multiplied by the fair value adjustments made to certain assets
acquired and liabilities assumed, primarily as indicated below. The pro forma adjustment to record
deferred taxes as part of the accounting for the mergers was computed as
follows:
|
PBG
|
PAS
|
Total
|
||||||||||
|
Estimated
fair value adjustment of identifiable intangible assets acquired
|
$ | 2,757 | $ | 3,028 | $ | 5,785 | ||||||
|
Estimated
fair value adjustment of inventory acquired
|
416 | 137 | 553 | |||||||||
|
Estimated
fair value adjustment of property, plant and equipment acquired
|
1,376 | 394 | 1,770 | |||||||||
|
Estimated
fair value adjustment of debt obligations assumed
|
(564 | ) | (121 | ) | (685 | ) | ||||||
|
Total
estimated fair value adjustments of net assets acquired
|
$ | 3,985 | $ | 3,438 | $ | 7,423 | ||||||
|
Net
deferred tax liabilities associated with the estimated fair
value adjustments
of net assets acquired, at 35%
|
$ | 1,395 | $ | 1,203 | $ | 2,598 | ||||||
For
purposes of this unaudited pro forma condensed combined financial information,
the United States federal statutory tax rate of 35% has been used for all
periods presented. This rate does not reflect PepsiCo’s effective tax rate,
which includes other tax items, such as state and foreign taxes, as well as
other tax charges or benefits, and does not take into account any historical or
possible future tax events that may impact the combined company.
PepsiCo
intends to permanently reinvest the international earnings of both PBG and PAS
and, accordingly, has not recorded deferred taxes on these amounts.
|
11)
|
Investments
in Noncontrolled Affiliates
|
PBG
Represents
a pro forma adjustment to record PepsiCo’s estimated gain of $515 million as a
result of remeasuring its previously held equity interest in PBG, Bottling
Group, LLC and PR Beverages. If PepsiCo’s stock price as of the date
the PBG merger is completed increases or decreases by 36% from the price assumed
in the unaudited pro forma condensed combined financial information, the gain
16
would
increase or decrease by approximately $380 million. The gain will
also be impacted by transactional activity, such as equity income and dividends,
up until the date the PBG merger is completed.
PAS
Represents
a pro forma adjustment to record PepsiCo’s estimated gain of $279 million as a
result of remeasuring its previously held equity interest in PAS and
Xxxxxxx. If PepsiCo’s stock price as of the date the PAS merger is
completed increases or decreases by 36% from the price assumed in the unaudited
pro forma condensed combined financial information, the gain would increase or
decrease by approximately $225 million. The gain will also be
impacted by transactional activity, such as equity income and dividends, up
until the date the PAS merger is completed.
SFAS 141R
requires that an acquirer remeasure its previously held equity interest in an
acquiree at its acquisition date fair value and recognize the resulting gain or
loss in earnings. The gain is calculated
based upon the acquisition date fair value of PBG and PAS, which will be
determined, in part, by PepsiCo’s actual stock price at the date that each of
the mergers, as applicable, is completed, as such stock price will be used to
determine the value of stock, stock options and restricted stock units to be
issued as consideration. Because the above pro forma
adjustments will not have a continuing impact, they are excluded from the
unaudited pro forma condensed combined statements of income, but are reflected
as adjustments to goodwill and retained earnings in the unaudited pro forma
condensed combined balance sheet.
Additionally,
PepsiCo’s previously held equity interests in PBG, Bottling Group, LLC, PR
Beverages, PAS and Xxxxxxx, as well as PBG’s previously held equity interest in
Xxxxxxxxxxx, have been eliminated as follows:
|
Debit/(Credit)
|
|||||||||
|
For
the 52 Weeks ended December 27, 2008
|
|||||||||
|
PBG
|
PAS
|
||||||||
|
Cost
of sales
|
$ | 4 | $ | 2 | |||||
|
Selling,
general and administrative expenses
|
$ | 23 | $ | 10 | |||||
|
Bottling
equity income
|
$ | 222 | $ | 120 | |||||
|
Net
income attributable to noncontrolling interests
|
$ | (59 | ) | $ | (10 | ) | |||
|
For
the 36 weeks ended September 5, 2009
|
|||||||||
|
PBG
|
PAS
|
||||||||
|
Cost
of sales
|
$ | (10 | ) | $ | (6 | ) | |||
|
Selling,
general and administrative expenses
|
$ | 38 | $ | (3 | ) | ||||
|
Bottling
equity income
|
$ | 222 | $ | 47 | |||||
|
Net
income/(loss) attributable to noncontrolling interests
|
$ | (90 | ) | $ | 3 | ||||
|
As
of September 5, 2009
|
||||||||
|
PBG
|
PAS
|
|||||||
|
PepsiCo’s
investments in noncontrolled affiliates
|
$ | (1,836 | ) | $ | (1,237 | ) | ||
|
PBG’s
investment in Lebedyansky
|
$ | (591 | ) | $ | - | |||
|
Accumulated
other comprehensive loss
|
$ | (225 | ) | $ | (196 | ) | ||
|
Deferred
income taxes
|
$ | (29 | ) | $ | 265 | |||
|
Common
stock and capital in excess of par value
|
$ | 142 | $ | - | ||||
|
Noncontrolling
interests
|
$ | 1,598 | $ | 200 | ||||
|
Retained
earnings
|
$ | (515 | ) | $ | (279 | ) | ||
17
|
12)
|
Related
Party Transactions
|
Reflects
the elimination of PepsiCo’s concentrate sales and finished goods to PBG and
PAS, related profit in inventory, royalty income for use of certain PepsiCo
trademarks by PBG and PAS, bottler incentives for direct marketing and
advertising support, manufacturing services in connection with the production of
certain finished beverage products, procurement services provided by PepsiCo to
PBG and PAS, allocation of overhead and other adjustments. In
addition, the adjustments reflect the elimination of PepsiCo’s sales to PBG and
PBG’s purchases of Frito-Lay snack food products for sale and distribution in
Russia. The related accounts receivable and accounts payable in
connection with the above transactions have also been
eliminated. These related party transactions have been eliminated as
of September 5, 2009 and for the 52 weeks ended December 27, 2008 and the 36
weeks ended September 5, 2009. While PAS’ reporting calendar differs
from PepsiCo’s and PBG’s, the impact of these calendar differences is not
material.
The
adjustments do not reflect an elimination for purchases of concentrate and/or
finished goods between PBG or PAS and PepsiCo’s respective joint ventures with
Unilever and Starbucks, which are accounted for by PepsiCo under the equity
method of accounting, as such transactions are expected to continue on an
arms-length basis subsequent to the mergers.
Related
party transactions between PBG and PAS are immaterial.
The
impact of each of the above items is reflected as an adjustment to the unaudited
pro forma condensed combined statements of income and balance sheet as
follows:
|
Debit/(Credit)
|
||||||||
|
For
the 52 Weeks ended December 27, 2008
|
||||||||
|
PBG
|
PAS
|
|||||||
|
Net
revenue (a)
|
$ | 2,939 | $ | 1,037 | ||||
|
Cost
of sales (b)
|
$ | (2,634 | ) | $ | (1,069 | ) | ||
|
Selling,
general and administrative expenses (c)
|
$ | (327 | ) | $ | 13 | |||
|
For
the 36 weeks ended September 5, 2009
|
||||||||
|
PBG
|
PAS
|
|||||||
|
Net
revenue (a)
|
$ | 2,022 | $ | 742 | ||||
|
Cost
of sales (b)
|
$ | (1,748 | ) | $ | (736 | ) | ||
|
Selling,
general and administrative expenses (c)
|
$ | (237 | ) | $ | 13 | |||
|
As
of September 5, 2009
|
||||||||
|
PBG
|
PAS
|
|||||||
|
Accounts
and notes receivable
|
$ | (453 | ) | $ | (59 | ) | ||
|
Accounts
payable and other current liabilities
|
$ | 453 | $ | 59 | ||||
|
Inventories
(d)
|
$ | (186 | ) | $ | (65 | ) | ||
|
|
a)
|
Primarily
includes sales of concentrate, sales of finished products, bottler
incentives, royalty fees and manufacturing and national account
services.
|
|
|
b)
|
Primarily
includes purchases of concentrate, purchases of finished products, bottler
incentives, royalty fees and fountain service
fees.
|
|
|
c)
|
Primarily
includes bottler incentives, purchases of advertising materials, fountain
service fees and purchases from
Frito-Lay.
|
|
|
d)
|
Reflects
the elimination of profit in
inventory.
|
18
