Originally created 07/21/98

Pepsi to buy Tropicana Seagram for $3.3 billion



NEW YORK -- Pepsi is marching toward the breakfast table in its latest battle with Coke.

PepsiCo Inc. is buying Tropicana, the leading seller of orange juice, from Seagram Co. for $3.3 billion. The deal, announced Monday, adds a new page to Pepsi's menu as it competes with Coca-Cola Co., the world's largest beverage maker and owner of Minute Maid.

For its part, Seagram gets a better deal than its planned public stock offering for Tropicana, which was looking less valuable as the stock sale neared. The Canadian liquor giant and owner of Universal Studios is selling Tropicana to raise money for its purchase of PolyGram, the world's No. 1 music company.

Tropicana, which includes Dole juices, had sales of $2 billion last year, benefiting from an expanded product line of exotic fruit blends, calcium-added juice and fruit drinks called Twisters. The juices will be added to a Pepsi buffet that includes the world's second-most popular soft drink behind Coke and snacks such as Ruffles, Doritos and Cheetos made by its Frito-Lay division.

The purchase marks another major step in Pepsi's campaign to build its powerful soft drink and snacks businesses. Pepsi spun off its slower-growing fast-food restaurants -- including Pizza Hut, Taco Bell and KFC -- into a separate company last year.

But the combined annual beverage sales of about $12.5 billion for Pepsi and Tropicana would still rank behind Coca-Cola's annual sales of $18.9 billion, which also includes Sprite and Barq's.

Tropicana had been up for sale since May, when Seagram announced the public offering to cover part of PolyGram's $10.4 billion price tag, but said it would entertain offers from interested bidders. Seagram initially hoped Tropicana would fetch $3.5 billion to $4 billion from investors, but analysts viewed that price as too optimistic, especially amid a sluggish market for initial public offerings.

A Pepsi spokesman said the companies started talking about a Tropicana deal two weeks ago. Last week, Seagram lowered the projected value of the Tropicana stock sale to $3.1 billion.

With the Pepsi deal, Seagram is getting back more than twice its investment. Seagram bought Tropicana for $1.2 billion in 1988 and acquired the Dole line for a reported $240 million in 1995.

Seagram shares were up 25 cents at $40.06¨ in late trading on the New York Stock Exchange. Pepsi shares were up 31¨ cents at $39.81¨.

Tropicana accounted for 40 percent of the ready-to-drink orange juice market in the United States and 71 percent of the lucrative not-from-concentrate segment. Its beverages are sold in 20 countries.

The sale is another advance in the transformation of Seagram. By purchasing PolyGram and shedding Tropicana, Seagram is now mainly focused on entertainment for the first time in its history, although it still holds the wine and spirits businesses that made it famous. Seagram's brands include Absolut vodka, Seagram's V.O. and Chivas Regal whisky.

Seagram entered the entertainment world with the purchase of MCA Inc., now known as Universal Studios, for $5.7 billion in 1995. The PolyGram deal will give Seagram's Universal Music Group several well-known record labels, including Motown, Island and Mercury, and a huge array of artists that also includes Elton John, Hanson, Sheryl Crow, Public Enemy and Boyz II Men.