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A sharply split U.S. Federal Trade Commission decided Aug. 1 not to challenge PepsiCo Inc.’s $13.9 billion acquisition of Chicago, Ill.-based Quaker Oats Co., maker of the popular Gatorade sports drink. The commissioners split 2-2 on whether to block the merger. The tie gives Purchase, N.Y.-based Pepsi the go-ahead to complete the deal, because FTC rules require a majority to vote in favor of litigation. The two Democratic commissioners argued in a dissent that the agency should have stopped the merger because Gatorade competes against Pepsi’s soft-drink products. But they could not persuade either Republican commissioner to join their cause. FTC Chairman Timothy J. Muris did not participate in the case because he had previously been a Pepsi consultant. The FTC staff had recommended challenging the deal. Pepsi chairman Steven Reinemund said the company expects to close the deal in a few days. “We’re delighted to get FTC clearance,” he said in a statement. “We look forward to completing the deal shortly and putting in action the detailed consolidation plans we’ve been building.” Pepsi did not make any concessions to the FTC to secure approval. But it had previously agreed to sell its All Sport drink to Atlanta-based Monarch Beverage Co., a deal expected to close late Wednesday. The sale was an effort to satisfy concerns the Pepsi-Quaker transaction would reduce competition in the sports drink market. In the dissent, commissioners Sheila F. Anthony and Mozelle W. Thompson said the deal will result in less price competition, fewer retailer allowances and a reduction in product innovation. “We believe — and we think a court would have agreed — that PepsiCo’s acquisition of Quaker Oats is unlawful and contrary to the public interest,” Anthony and Thompson said. “As a result of the commission’s failure to act today, we believe that consumers of sports drinks and, indeed all soft drinks, will suffer the consequences.” That argument failed to sway either commissioners Orson Swindle or Thomas B. Leary. They questioned in a separate statement whether Gatorade offers significant competition to soft drinks produced by Pepsi and Coca-Cola. They called Gatorade a “non-carbonated drink with niche-market appeal.” The two Republicans also said the FTC should consider a broader investigation of competitive practices in the soft-drink market, including whether exclusive contracts with retailers illegally foreclose competition. Antitrust lawyers cautioned against reading too much into the partisan split. “This is pretty uncommon,” said Stephen Mahinka, a partner at Morgan, Lewis & Bockius in Washington. “They are like a court. They know they have more weight if they are close to unanimous.” Mahinka said the vote may have proceeded differently if Muris had participated. “You usually have a chairman who can cajole enough people to get at least a four-to-one vote,” he said. “You ordinarily cannot count on party-line voting.” Leon Greenfield, a partner at Wilmer, Cutler & Pickering in Washington, said the Democrats were ultimately unsuccessful because Pepsi eliminated the horizontal overlap by selling All Sport. The real question, he noted, was whether Monarch would be strong enough to keep All Sport viable. “This was a bit of an exotic theory that the Republicans were reluctant to go along with,” he said. Even if the Democrats had convinced a Republican to join their cause, the FTC would have had a tough time winning. David Balto, a partner at White & Case, said there were many memorandums from Quaker officials discussing how Pepsi’s All Sport — despite its 4 percent market share — caused the company to keep prices low and to innovate. “There has been no case since the 1970s where the government successfully challenged a merger where the market share was this small,” Balto said. A few months ago, the deal appeared in jeopardy as Pepsi prepared to move forward with the Monarch sale without concluding talks with the FTC. A source indicated that the staff and some commissioners were upset with the decision, which Pepsi ultimately reversed. Around the same time, Pepsi added legal talent. Besides using Jim Rill and Marc Schildkraut at Howrey, Simon, Arnold & White, it also brought in Michael Sohn of Arnold & Porter. Sohn is credited with settling a monopolization case the FTC was preparing against Intel Corp., sparing the chipmaker the public drubbing Microsoft Corp. has faced. The new push included intensive talks with the staff regarding the viability of Monarch as the buyer of All Sport and one-on-one discussions with the commissioners on why the deal would not harm competition, sources said. Quaker Oats’ antitrust team, led by Kevin J. Arquit of Clifford Chance Rogers & Wells, also became more active in the talks. None of the lawyers returned calls for comment. Though the FTC did not impose any conditions on the deal, PepsiCo had previously agreed to some limits on its behavior as part of the Monarch sales agreement. This included a 10-year agreement to keep Gatorade in Quaker’s warehouse distribution rather than in Pepsi’s system. The FTC likely drove those terms, said Caroline Levy, beverage analyst at UBS Warburg. Wall Street analysts and investment bankers had expected PepsiCo to put Gatorade into the Pepsi distribution system and thereby increase Gatorade’s sales in certain channels such as vending machines. But PepsiCo had never said it had any such ambitions for the sports drink, and, in fact, has estimated that Gatorade’s growth rate is likely to come off slightly from its 12 percent compounded annual growth rate in revenue over the past three years. “It shows that they meant what they said that they didn’t buy Gatorade to accelerate its growth but [did the deal] to accelerate the growth of Tropicana by putting it through [Quaker's] warehouse distribution system — and putting Quaker snacks through Frito-Lay’s distribution channels,” Levy said. PepsiCo’s distribution system for carbonated soft drinks isn’t well-suited for perishable items such as Tropicana orange juice, she noted. Albert Foer, president of the American Antitrust Institute, said the FTC’s failure to stop Quaker-Pepsi is indicative of its overall embrace of food industry consolidation. “The FTC has not acted as a circuit breaker,” he said. “They keep allowing the big to get bigger.” Copyright (c)2001 TDD, LLC. All rights reserved.

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