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As filed with the Securities and Exchange Commission on December 31, 2009

Registration No. 333-162261

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2 TO FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

PepsiCo, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

North Carolina		2080		13-1584302
(State or Other Jurisdiction of Incorporation or Organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

 

 

700 Anderson Hill Road

Purchase, New York 10577

(914) 253-2000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

Thomas H. Tamoney, Jr.

Senior Vice President,

Deputy General Counsel and Assistant Secretary

700 Anderson Hill Road

Purchase, New York 10577

(914) 253-2000

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

George R. Bason, Jr. Marc O. Williams Davis Polk & Wardwell LLP 450 Lexington Avenue New York, New York 10017 (212) 450-4000		Robert I. Townsend, III George F. Schoen Cravath, Swaine & Moore LLP Worldwide Plaza 825 Eighth Avenue New York, New York 10019 (212) 474-1000

Approximate date of commencement of proposed sale to the public:    As soon as practicable after the effective date of this registration statement and the effective time of the merger of The Pepsi Bottling Group, Inc. (“PBG”) with and into Pepsi-Cola Metropolitan Bottling Company, Inc. (“Metro”), a wholly owned subsidiary of PepsiCo, Inc. (“PepsiCo”), as described in the Agreement and Plan of Merger dated as of August 3, 2009 among PBG, PepsiCo and Metro.

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the “Securities Act”), check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    x		Accelerated filer                     ¨
Non-accelerated filer      ¨   (Do not check if a smaller reporting company)		Smaller reporting company    ¨

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)              ¨  

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)    ¨  

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

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Information contained herein is subject to completion or amendment. A registration statement relating to the shares of PepsiCo common stock to be issued in the merger has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale is not permitted or would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

 

PRELIMINARY PROXY STATEMENT/PROSPECTUS

DATED DECEMBER 31, 2009, SUBJECT TO COMPLETION

One Pepsi Way

Somers, New York 10589

[—], 2010

Dear Fellow Stockholders:

On behalf of your board of directors, we are pleased to invite you to attend a special meeting of stockholders of The Pepsi Bottling Group, Inc. (“PBG”), which will be held at PBG Worldwide Headquarters, One Pepsi Way, Somers, New York 10589, on [—], 2010 at [—] a.m., Eastern Time. At the special meeting, you will be asked to consider and vote on a proposal to adopt the Agreement and Plan of Merger dated as of August 3, 2009 among PBG, PepsiCo, Inc. (“PepsiCo”) and Pepsi-Cola Metropolitan Bottling Company, Inc., a wholly owned subsidiary of PepsiCo, Inc. (“Metro”).

The merger agreement sets forth the terms and conditions under which PBG will merge with and into Metro, with Metro continuing as the surviving corporation and a wholly owned subsidiary of PepsiCo. As of the effective time of the merger, holders of outstanding shares of PBG common stock (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 or, at their election, $36.50 in cash, without interest, per share of PBG common stock, subject to proration provisions which provide that an aggregate 50% of the outstanding shares of PBG common stock 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 outstanding shares of PBG common stock not held by PepsiCo or any of its subsidiaries will be converted into the right to receive cash. Subject to the proration procedures described in the preceding sentence, each share with respect to which a valid cash election is not made will be converted into the right to receive 0.6432 shares of PepsiCo common stock at the effective time of the merger.

Assuming August 3, 2009, the last full trading day before the public announcement of the merger, were the closing date of the merger, one share of PepsiCo common stock received by a PBG stockholder would have been worth $56.20 per share. Assuming [—], 2010, the most recent practicable trading day prior to the date of this proxy statement/prospectus, were the closing date of the merger, one share of PepsiCo common stock received by a PBG stockholder would have been worth $[—] per share. The market prices of both PepsiCo common stock and PBG common stock will fluctuate prior to completion of the merger. You are urged to obtain current market quotations for PepsiCo common stock and PBG common stock. The principal trading market for both PepsiCo common stock and PBG common stock is the New York Stock Exchange, on which PepsiCo common stock is listed under the symbol “PEP” and PBG common stock is listed under the symbol “PBG.”

This proxy statement/prospectus gives you detailed information about the special meeting, the merger agreement and the merger, and a copy of the merger agreement is included as Appendix A to this proxy statement/prospectus. You are encouraged to read this proxy statement/prospectus in its entirety, including the section entitled “Risk Factors” beginning on page [—] of this proxy statement/prospectus, and the merger agreement carefully.

The board of directors of PBG, by actions taken without the participation of the two directors affiliated with PepsiCo, and after considering the unanimous recommendation of a special committee comprised entirely of independent directors and the approval of the audit and affiliated transactions committee of PBG, has approved and declared advisable the merger agreement and the transactions contemplated thereby and has determined that the merger agreement and the transactions contemplated thereby are substantively and procedurally fair to and are advisable and in the best interests of the unaffiliated security holders of PBG. The special committee reached its conclusion after consultation with independent legal and financial advisors. The board of directors of PBG therefore recommends that you vote “FOR” approval of the proposal to adopt the merger agreement.

In addition, PBG has been informed that each of PepsiCo and Metro believes that the merger is both procedurally and substantively fair to the unaffiliated stockholders of PBG.

Adoption of the merger agreement requires the affirmative vote of the holders of (i) a majority of the outstanding voting power of the shares of PBG common stock and PBG Class B common stock entitled to vote, voting as a single class, and (ii) a majority of the votes cast by the holders of outstanding shares of PBG common stock entitled to vote, voting separately as a class. PepsiCo has agreed to vote all shares of PBG common stock and PBG Class B common stock beneficially owned by it and its subsidiaries for approval of the proposal to adopt the merger agreement.

YOUR VOTE IS VERY IMPORTANT. Therefore, whether or not you plan to attend the special meeting, please complete and promptly mail your proxy card in the return envelope enclosed, or authorize the individuals named on your proxy card to vote your shares by calling the toll-free telephone number or by using the Internet as described in the instructions included with your proxy card. This will not prevent you from voting in person at the special meeting if you so desire. Unless indicated otherwise in this proxy statement/prospectus, the failure to vote will have the same effect as a vote against approval of the proposal to adopt the merger agreement.

Sincerely yours,

Eric J. Foss

Chairman of the Board and

Chief Executive Officer

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the merger, passed upon the merits or fairness of the merger, or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.

This proxy statement/prospectus is dated [—], 2010, and is first being mailed to stockholders of The Pepsi Bottling Group on or about [—], 2010.

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ADDITIONAL INFORMATION

This document is the proxy statement of The Pepsi Bottling Group, Inc. for its special meeting of stockholders and the prospectus of PepsiCo, Inc. for the shares of PepsiCo, Inc. common stock to be issued in the merger. This proxy statement/prospectus incorporates important business and financial information about PepsiCo, Inc. and The Pepsi Bottling Group, Inc. from documents that are not included in or delivered with this proxy statement/prospectus. This information is available to you without charge upon your written or oral request. You can obtain documents incorporated by reference in this proxy statement/prospectus by requesting them in writing or by telephone from PepsiCo, Inc. or The Pepsi Bottling Group, Inc. at the following addresses:

 

PepsiCo, Inc. 700 Anderson Hill Road Purchase, New York 10577 Manager, Shareholder Relations Telephone: 914-253-3055 Email: investor@pepsico.com		The Pepsi Bottling Group, Inc. One Pepsi Way Somers, New York 10589 Investor Relations Telephone: 914-767-6267 Email: shareholder.relations@pepsi.com

If you would like additional copies of this proxy statement/prospectus, please contact Morrow & Co., LLC, the proxy solicitor for The Pepsi Bottling Group, Inc., toll-free at 1-800-607-0088 (banks and brokerage firms call toll-free at 1-800-662-5200).

If you would like to request documents, please do so by [—], 2010 in order to receive them before the special meeting.

See “Where You Can Find More Information” beginning on page [—] of this proxy statement/prospectus for further information.

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Notice of Special Meeting of Stockholders

 

Time and Date		[—] a.m. Eastern Time on [—], 2010.
Place		PBG Worldwide Headquarters One Pepsi Way Somers, New York 10589
Live Webcast		Available at www.pbg.com, starting at [—] a.m. Eastern Time on [—], 2010.
Items of Business		(1)    To consider and vote upon the proposal to adopt the Agreement and Plan of Merger dated as of August 3, 2009, as it may be amended from time to time, among The Pepsi Bottling Group, Inc., a Delaware corporation, PepsiCo, Inc., a North Carolina corporation, and Pepsi-Cola Metropolitan Bottling Company, Inc., a New Jersey corporation and a wholly owned subsidiary of PepsiCo, Inc., as more fully described in the enclosed proxy statement/prospectus.
		(2)    To transact such other business as may properly come before the special meeting or any postponement or adjournment of the special meeting.
Record Date		You are entitled to vote only if you were a holder of common stock of The Pepsi Bottling Group as of the close of business on January 4, 2010.
Meeting Admission		You are entitled to attend the special meeting only if you were a holder of common stock of The Pepsi Bottling Group as of the close of business on January 4, 2010. If you plan to attend the special meeting and your shares of common stock of The Pepsi Bottling Group are registered in your name, please call 914-767-6267 or email shareholder.relations@pepsi.com so that an admission card may be sent to you. If you hold shares through an account with a bank or broker, you must contact your bank or broker to request a legal proxy in order to attend the special meeting.
Proxy Voting		Your vote is very important. Whether or not you plan to attend the special meeting, please promptly vote by Internet or telephone, or by marking, signing, dating and returning the enclosed proxy card (if you are a registered holder), or the voting instruction card provided by your bank or broker (if you hold your shares through an account with a bank or broker) so that your shares will be represented at the special meeting.

The board of directors of The Pepsi Bottling Group, Inc. recommends that you vote “FOR” approval of the proposal to adopt the merger agreement.

 

[—], 2010

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		Page
SUMMARY		1
QUESTIONS AND ANSWERS ABOUT THE MERGER		21
SPECIAL FACTORS		28
General		28
The PAS Merger		28
Background of the Merger		28
Recommendation of the PBG Special Committee and the PBG Board as to Fairness of the Merger		47
PepsiCo’s Reasons for, and Purpose of, the Merger		54
Position of PepsiCo and Metro Regarding Fairness of the Merger		54
Effects of the Merger on PBG		57
Plans for PBG		58
Certain PBG Forecasts		59
Opinions of PBG’s Financial Advisors		60
Opinion of PepsiCo’s Financial Advisors		87
Accounting Treatment		100
Regulatory Approvals Required for the Merger		101
Material United States Federal Income Tax Consequences		102
Appraisal Rights		106
Certain Litigation Matters		108
Financing of the Merger		112
Fees and Expenses Relating to the Merger		113
RISK FACTORS		114
FORWARD-LOOKING STATEMENTS		119
SPECIAL MEETING OF STOCKHOLDERS OF PBG		121
Date, Time and Place		121
Purpose of the Special Meeting		121
Record Date; Shares Entitled to Vote; Quorum		121
Vote Required; Abstentions and Broker Non-Votes		121
Shares Held by PBG’s Directors and Executive Officers		122
Voting of Proxies		122
Revocability of Proxies		123
Election to Receive Cash Consideration		123
Board of Directors Recommendation		124
Appraisal Rights		124
Solicitation of Proxies and Expenses		125
Stockholder List		125
THE COMPANIES		126
PepsiCo		126
Metro		126
PBG		126
THE MERGER AGREEMENT		127
Explanatory Note Regarding the Summary of the Merger Agreement		127
Structure of the Merger		127
Merger Consideration		127
Election Procedure		128

 

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Proration		130
Procedures for Surrendering PBG Stock Certificates		133
Employee Matters		134
Treatment of PBG Equity Awards		135
Fractional Shares		136
Effective Time		136
Conditions to the Completion of the Merger		137
Shares Subject To Properly Exercised Appraisal Rights		138
Representations and Warranties		138
Conduct of Business Pending the Merger		140
Termination of the Merger Agreement		143
Termination Fees Payable by PBG		144
Amendments; Waivers		145
Stock Market Listing		145
Expenses		145
THE PAS MERGER		146
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION		147
DIRECTORS AND EXECUTIVE OFFICERS OF PEPSICO AND METRO		165
Directors and Executive Officers of PepsiCo		165
Directors and Executive Officers of Metro		171
DIRECTORS AND EXECUTIVE OFFICERS OF PBG		172
Directors and Executive Officers of PBG		172
INTERESTS OF CERTAIN PERSONS IN THE MERGER		177
PepsiCo and Metro		177
PBG		178
RELATED PARTY TRANSACTIONS		187
Background of PepsiCo and its Subsidiaries’ Beneficial Ownership of Shares		187
Commercial Relationships		187
Other Transactions		188
Transactions with Bottlers in Which PepsiCo Holds an Equity Interest		189
DESCRIPTION OF PEPSICO CAPITAL STOCK		190
Authorized and Issued PepsiCo Stock		190
PepsiCo Common Stock		190
PepsiCo Convertible Preferred Stock		190
Transfer Agent and Registrar		193
Stock Exchange Listing		193
COMPARATIVE RIGHTS OF STOCKHOLDERS		194
Authorized Capital Stock		194
Voting Rights		194
Cumulative Voting		195
Dividends		195
Size of Board of Directors		195
Removal of Directors and Filling Vacancies on the Board of Directors		196
Special Meetings of Stockholders		196
Notice of Stockholder Proposals and Nominations of Director Candidates by Stockholders		196
Preemptive Rights		197
Stockholder Action Without a Meeting		197

 

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		Page
Amendments to Articles of Incorporation or Certificate of Incorporation		197
Amendments to Bylaws		198
Stockholder Rights Agreement		198
Stockholder Vote on Fundamental Issues or Extraordinary Corporate Transactions		199
Anti-Takeover Provisions		200
Appraisal Rights		200
Directors and Officers Liability and Indemnification		201
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF PBG		204
Stock Ownership of Certain Beneficial Owners		204
OWNERSHIP OF PBG COMMON STOCK		204
Ownership of Common Stock by Directors and Executive Officers		204
CERTAIN INFORMATION CONCERNING PEPSICO AND METRO		205
Information Regarding Directors and Executive Officers		205
Prior Public Offerings		205
CERTAIN INFORMATION CONCERNING PBG		205
Information Regarding Directors and Executive Officers		205
Prior Public Offerings		205
Purchase of Equity Securities		205
PROVISIONS FOR UNAFFILIATED STOCKHOLDERS		206
LEGAL MATTERS		207
EXPERTS		207
WHERE YOU CAN FIND MORE INFORMATION		208
APPENDICES
Appendix A – Agreement and Plan of Merger		A-1
Appendix A-1 – Waiver Letter from PepsiCo		A-1-1
Appendix B – Opinion of Morgan Stanley & Co. Incorporated		B-1
Appendix C – Opinion of Perella Weinberg Partners LP		C-1
Appendix D – Section 262 of the Delaware General Corporation Law		D-1

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER

 

Q:	When and where is the special meeting?

 

A:	The special meeting of stockholders of The Pepsi Bottling Group, Inc. (“PBG”) will take place on [—], 2010, at [—] a.m., Eastern Time, at PBG Worldwide Headquarters, One Pepsi Way, Somers, New York 10589.

 

Q:	What is happening at the special meeting?

 

A:

At the special meeting, stockholders of PBG will be asked (1) to consider and vote upon a proposal to adopt the Agreement and Plan of Merger dated as of August 3, 2009 (which, as amended from time to time, is referred to in this proxy statement/prospectus as the merger agreement), among PBG, PepsiCo, Inc. (“PepsiCo”) and Pepsi-Cola Metropolitan Bottling Company, Inc. (“Metro”), a wholly-owned subsidiary of PepsiCo, under which, at the effective time of the merger, each outstanding share of PBG common stock not held by PepsiCo or any of its subsidiaries, and with respect to which appraisal rights have not been properly exercised and perfected under the Delaware General Corporation Law, which is referred to in this proxy statement/prospectus as Delaware law, will be converted into the right to receive the merger consideration as described in this proxy statement/prospectus; and (2) to transact any other business that may properly come before the special meeting or any adjournments or postponements of that meeting.

 

Q:	What will happen in the merger?

 

A:	In the merger, PBG will be merged with and into Metro, a wholly owned subsidiary of PepsiCo. Metro will be the surviving corporation in the merger.

 

Q:	How does the merger relate to PepsiCo’s proposed acquisition of PepsiAmericas, Inc.?

 

A:

On August 3, 2009, PepsiCo, PepsiAmericas, Inc. (“PAS”) and Metro entered into an Agreement and Plan of Merger, which, as amended from time to time, is referred to in this proxy statement/prospectus as the PAS merger agreement, pursuant to which PAS will be merged with and into Metro, with Metro as the surviving corporation in the merger, which is referred to in this proxy statement/prospectus as the PAS merger. Concurrently with the filing of this proxy statement/prospectus, PepsiCo and PAS are filing a proxy statement/prospectus in connection with the PAS merger that will be mailed to stockholders of PAS. The PAS merger is a separate transaction; however, the satisfaction of specified conditions in the merger agreement, to the extent they relate to antitrust and competition laws, is a condition to the completion of the PAS merger. Other than satisfaction of those conditions in the merger agreement relating to antitrust and competition laws, which is a condition to the completion of the PAS merger, the merger and the PAS merger are not cross-conditional, i.e., completion of the PAS merger is not a condition of the merger, and vice-versa.

 

Q:	What will I receive in the merger?

 

A:

As a result of the merger, each of your shares of PBG common stock will be converted into the right to receive either 0.6432 of a share of PepsiCo common stock or, at your election, $36.50 in cash, without interest, in each case subject to the proration procedures described below and assuming that you do not properly exercise and perfect appraisal rights in respect of your shares.

 

Q:	Is it certain that I will receive the form of consideration I choose to receive?

 

A:

No. PepsiCo will pay $36.50 in cash, without interest, per share of PBG common stock for 50% of the outstanding shares of PBG common stock not held by PepsiCo or any of its subsidiaries and issue 0.6432 of a share of PepsiCo common stock per share of PBG common stock for the remaining 50% of the outstanding shares of PBG common stock not held by PepsiCo or any of its subsidiaries, which is referred to in this proxy statement/prospectus as the 50% cash/50% stock allocation. If the total number of shares of

 

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PBG common stock for which a valid election to receive cash is made is higher than 50% of the outstanding shares of PBG common stock not held by PepsiCo or any of its subsidiaries, a pro rata portion of the shares for which a valid election to receive cash is made, which we refer to as cash election shares in this proxy statement/prospectus, will be converted into the right to receive PepsiCo common stock in order to provide for an aggregate 50% cash/50% stock allocation among all outstanding shares of PBG common stock not held by PepsiCo or any of its subsidiaries. If the total number of shares of PBG common stock for which a valid election to receive cash is made is lower than 50% of the outstanding shares of PBG common stock not held by PepsiCo or any of its subsidiaries, a pro rata portion of the shares for which no valid cash election is made will be converted into the right to receive cash in order to provide for an aggregate 50% cash/50% stock allocation among all outstanding shares of PBG common stock not held by PepsiCo or any of its subsidiaries. Additionally, the actual number of shares of PBG common stock as to which a valid election to receive cash has been made will reflect a reduction for the number of shares of PBG common stock with respect to which appraisal rights have been properly exercised and perfected under Delaware law immediately prior to the effective time of the merger. Accordingly, there is no assurance that you will receive the form of consideration that you choose to receive with respect to all of the shares of PBG common stock you hold. The treatment of shares of PBG common stock and PBG Class B common stock owned by PepsiCo or any of its subsidiaries will not affect the 50% cash/50% stock allocation.

Illustrative Examples of Proration

For illustrative purposes only, the following examples describe the application of the proration provisions of the merger agreement in the case of an oversubscription of cash election shares and in the case of an undersubscription of cash election shares. Solely for the purposes of these examples, it is assumed that 10,000,000 shares of PBG common stock held by holders other than PepsiCo and its subsidiaries were outstanding at the time of the proration calculation, resulting in a cash election number of 5,000,000 (50% of 10,000,000). It is also assumed that there were no shares with respect to which appraisal rights had been properly exercised and perfected under Delaware law.

Example 1 (100% Cash Elections)

Assume that valid cash elections are received with respect to all 10,000,000 of the outstanding shares of PBG common stock. Because PepsiCo will pay cash for a number of shares equal to 50% (or 5,000,000) of such outstanding shares of PBG common stock, 5,000,000 of the 10,000,000 cash election shares (or 50% of the cash election shares) would be converted into the right to receive 0.6432 shares of PepsiCo common stock per share of PBG common stock instead of cash.

Further assume that Stockholder A holds 1,600 shares of PBG common stock. Stockholder A would receive cash for each of 800 (or 50%) of her shares of PBG common stock and 0.6432 shares of PepsiCo common stock for each of the remaining 800 (or 50%) of her shares of PBG common stock.

Example 2 (Oversubscription of Cash Election Shares)

Assume that valid cash elections are received with respect to 6,000,000 shares (60% of the outstanding shares) of PBG common stock. Because PepsiCo will pay cash for a number of shares equal to 50% (or 5,000,000) of such outstanding shares of PBG common stock, 1,000,000 of the 6,000,000 cash election shares (or 16.66% of the cash election shares) would be converted into the right to receive 0.6432 shares of PepsiCo common stock per share of PBG common stock instead of cash.

Application of proration:

 

•

Partial Cash Election. Assume that Stockholder A holds 1,600 shares of PBG common stock and makes a valid cash election with respect to 960 (or 60%) of her shares, leaving 640 shares as non-electing shares. Pursuant to the proration procedure, 16.66% of her cash election shares (or 160 out of 960 shares) will be converted into the right to receive 0.6432 shares of PepsiCo common stock

 

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per share of PBG common stock. All 640 of Stockholder A’s non-electing shares will be converted into the right to receive 0.6432 shares of PepsiCo common stock per share of PBG common stock. Stockholder A would therefore receive cash for 800 (or 50%) of her shares of PBG common stock and 0.6432 shares of PepsiCo common stock for each of the remaining 800 of her shares of PBG common stock.

 

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Complete Cash Election. Assume that Stockholder B holds 1,600 shares of PBG common stock and makes a valid cash election with respect to all 1,600 of her shares. Stockholder B would receive 0.6432 shares of PepsiCo common stock for each of 267 (or 16.66%) of her shares of PBG common stock and cash for the remaining 1,333 (or 83.34%) of her shares of PBG common stock.

 

•

No Election. Assume that Stockholder C holds 1,600 shares of PBG common stock and does not make a cash election for any of his shares, leaving all 1,600 of his shares as non-electing shares. All of Stockholder C’s shares will each be converted into the right to receive 0.6432 shares of PepsiCo common stock, and Stockholder C will not receive any cash.

Example 3 (Subscription of Cash Election Shares Equals 50%)

Assume that valid cash elections are received with respect to 5,000,000 (or 50%) of the outstanding shares of PBG common stock. Because the number of cash election shares is equal to 50% of the shares of PBG common stock outstanding, no proration will be required and all cash election shares will be converted into the right to receive cash and all non-electing shares will be converted into the right to receive PepsiCo common stock, resulting in the 50% cash/50% stock allocation.

Example 4 (Undersubscription of Cash Election Shares)

Assume that valid cash elections are received with respect to 2,000,000 (or 20%) of the outstanding shares of PBG common stock. Because PepsiCo will pay cash for a number of shares equal to 50% of such outstanding shares of PBG common stock, 3,000,000 of the 8,000,000 non-electing shares (or 37.5% of the non-electing shares) will be converted into the right to receive cash.

Application of proration:

 

•

Partial Cash Election. Assume that Stockholder A holds 1,600 shares of PBG common stock and makes a valid cash election with respect to 800 (or 50%) of her shares, leaving 800 shares as non-electing shares. Pursuant to the proration procedure, Stockholder A will receive cash for those 800 shares as well as cash for 37.5% of her non-electing shares (or 300 out of 800 shares). Stockholder A will therefore receive cash for 1,100 (or 68.75%) of her shares of PBG common stock and 0.6432 shares of PepsiCo common stock for each of the remaining 500 of her shares of PBG common stock.

 

•

Complete Cash Election. Assume that Stockholder B holds 1,600 shares of PBG common stock and makes a valid cash election with respect to all 1,600 of her shares. Because cash elections are undersubscribed, all of Stockholder B’s shares will be converted into cash as elected.

 

•

No Election. Assume that Stockholder C holds 1,600 shares of PBG common stock and does not make a cash election for any of his shares, leaving all 1,600 shares as non-electing shares. Pursuant to the proration procedure, Stockholder C will receive cash for 600 (or 37.5%) of his 1,600 shares and 0.6432 shares of PepsiCo common stock for each of the remaining 1,000 of his shares of PBG common stock.

Example 5 (No Cash Elections)

Assume that no valid cash elections are received. Because PepsiCo will pay cash for a number of shares equal to 50% (or 5,000,000) of the outstanding shares of PBG common stock, 5,000,000 of the 10,000,000 shares (or 50% of the shares) would be converted into the right to receive 0.6432 shares of PepsiCo common stock per share of PBG common stock instead of cash.

 

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Further assume that Stockholder A holds 1,600 shares of PBG common stock. Stockholder A would receive 0.6432 shares of PepsiCo common stock for each of 800 (or 50%) of her shares of PBG common stock and cash for the remaining 800 (or 50%) of her shares of PBG common stock.

 

Q:	How do I elect cash as the form of consideration I prefer to receive in the merger for some or all of my shares?

 

A:

An election form and letter of transmittal and instructions will be mailed no more than 40 business days and no fewer than 15 business days before the anticipated effective time of the merger to holders of record of PBG common stock as of two business days before the mailing date. An election to receive cash will only be effective if received from a record holder no later than 5:00 p.m. New York, NY time on the third business day prior to the effective time of the merger. PepsiCo will publicly announce the deadline for the receipt of election forms from holders of record of PBG stock as soon as practicable but in no event later than eight business days prior to the effective time of the merger. Record holders may also choose to complete the optional cash allocation addendum to the election form and letter of transmittal if you wish to elect to designate the priority in which your shares are to be exchanged for cash. If you do not wish to elect to receive cash, you should not complete the election form and letter of transmittal.

If you own shares of PBG common stock in “street name” through a broker or other financial institution and you wish to make an election to receive cash, you will receive or should seek instructions from the institution holding your shares concerning how to make your election. Any instructions must be given to your broker or other financial institution sufficiently in advance of the election deadline for record holders in order to allow your broker or financial institution sufficient time to cause the record holder of your shares to make an election as described above. Therefore, you should carefully read any materials you receive from your broker. If you instruct a broker to submit an election for your shares, you must follow your broker’s directions for changing those instructions.

All elections are subject to the proration procedures described in the immediately preceding Question and Answer. If you do not make a valid election to receive cash, you will be deemed to have made an election to receive, and will receive, PepsiCo common stock for all of your shares of PBG common stock, subject to the proration procedures described above.

Questions regarding the election to receive cash should be directed to:

Morrow & Co., LLC

470 West Ave.

Stamford, CT 06902

Telephone (PBG stockholders, toll-free): 1-800-607-0088

Telephone (banks and brokerage firms, toll-free): 1-800-662-5200

 

Q:	How do I elect PepsiCo common stock as the form of consideration I prefer to receive in the merger?

 

A:

You do not need to elect to receive PepsiCo common stock. If you do not make a valid election to receive cash, you will be deemed to have made an election to receive, and will receive, shares of PepsiCo common stock for all of your shares of PBG common stock, subject to the proration procedures described above.

 

Q:	What will PepsiCo and its subsidiaries elect to do with the shares of PBG common stock and PBG Class B common stock that they own?

 

A:

PepsiCo and its subsidiaries may not make an election to receive cash. Each share of PBG common stock held by PepsiCo or Metro, or by PBG as treasury stock, and each share of PBG Class B common stock held by PepsiCo or Metro, in each case immediately prior to the effective time of the merger, will be canceled, and no payment will be made with respect thereto. Each share of PBG common stock and PBG Class B

 

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common stock owned by any subsidiary of PepsiCo other than Metro immediately prior to the effective time of the merger will automatically be converted into the right to receive 0.6432 of a share of PepsiCo common stock.

 

Q.	What do I do if I want to revoke or change my election to receive cash after I have mailed my signed election form?

 

A:

If you hold shares in registered form, you may revoke your election to receive cash or change the amount of shares for which you elect to receive cash by sending a signed written notice to The Bank of New York Mellon, the exchange agent, identifying the shares of PBG common stock for which you are revoking your election or, if you are changing your election, by sending a properly completed revised election form. For a notice of revocation or change of an election to be effective, it must be received by the exchange agent prior to the election deadline. If you hold your shares in “street name,” you must follow your broker’s instructions for revoking an election.

 

Q:	What stockholder vote is necessary to approve the merger?

 

A:

Adoption of the merger agreement requires the affirmative vote of the holders of (i) a majority of the outstanding voting power of the shares of PBG common stock and PBG Class B common stock entitled to vote, voting as a single class (each share of PBG Class B common stock carries 250 votes and all of the outstanding shares of PBG Class B common stock are held by PepsiCo and its subsidiaries), and (ii) a majority of the votes cast by the holders of outstanding shares of PBG common stock entitled to vote, voting separately as a class.

PepsiCo has agreed under the merger agreement that it will vote or cause to be voted all shares of PBG common stock and PBG Class B common stock beneficially owned by it or any of its subsidiaries (including Metro) in favor of the proposal to adopt the merger agreement. As of the record date, PepsiCo or its subsidiaries owned 70,066,458 shares of PBG common stock and 100,000 shares of PBG Class B common stock, representing 100% of the outstanding shares of PBG Class B common stock, approximately [—]% of the combined voting power of the outstanding shares of PBG common stock and PBG Class B common stock, and approximately [—]% of the outstanding shares of PBG common stock entitled to vote. PepsiCo has stated publicly that it is unwilling to sell its shares of PBG common stock or PBG Class B common stock or vote such shares in favor of a transaction with a third party.

 

Q:	Does PBG’s board of directors recommend that stockholders approve the merger?

 

A:

Yes. The board of directors of PBG (which is referred to in this proxy statement/prospectus as the PBG Board), by actions taken without the participation of the two directors affiliated with PepsiCo and after giving consideration to the unanimous recommendation of a special committee comprised entirely of independent directors (which is referred to in this proxy statement/prospectus as the PBG Special Committee) and the approval of the audit and affiliated transactions committee of PBG, recommends that PBG’s stockholders vote “FOR” approval of the proposal to adopt the merger agreement. The PBG Special Committee reached its recommendation following consultation with independent legal and financial advisors and consideration of a number of other factors. See “Special Factors—Background of the Merger” and “Special Factors—Recommendation of the PBG Special Committee and the PBG Board as to Fairness of the Merger.”

 

Q.	How do I change my vote after I have mailed my signed proxy card?

 

A:	You may change your vote at any time before your proxy is voted by revoking your proxy in any of the following ways:

 

•

sending the Secretary of PBG a written notice revoking the proxy prior to the date of the special meeting at the address provided elsewhere in this proxy statement/prospectus;

 

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•

submitting, prior to the date of the special meeting, a duly executed proxy with a later date;

 

•

attending the special meeting and voting in person at the special meeting (your attendance at the special meeting will not, by itself, revoke your proxy; you must vote in person at the meeting); or

 

•

if you have instructed a broker, bank or other nominee to vote your shares, following the directions received from your broker, bank or other nominee.

 

Q:	If my shares are held in “street name” by my broker, will my broker vote my shares for me?

 

A:

If you do not provide your broker with instructions on how to vote your shares held in “street name,” your broker will not be permitted to vote your shares on the proposal to adopt the merger agreement. You should therefore instruct your broker how to vote your shares. Failure to instruct your broker how to vote your shares will be the equivalent of voting against approval of the proposal to adopt the merger agreement.

 

Q:	Will I be allowed to vote shares allocated to my account in PBG’s 401(k) plan and elect the form of consideration I prefer to receive?

 

A:

Yes. If you are a current or former PBG employee with shares allocated to your accounts under the PBG 401(k) Savings Program or the PBG 401(k) Program, you will receive information explaining the procedures by which you can instruct the trustee of the plan to vote the shares allocated to your account and how to submit an election on the form of consideration you prefer to receive for such shares. You also will receive information about a special election, which is made before the effective time of the merger, to reinvest the consideration you receive for such shares into one or more of the plan’s investment choices, including a fund that invests in PepsiCo common stock. If you do not give voting instructions in respect of the approval of the adoption of the merger agreement to the plan trustee by mailing your proxy card or voting by telephone or by the Internet, the trustee will vote shares allocated to your accounts under the plans in the same proportion as shares held in that plan for which voting instructions were timely received.

 

Q:	When do you expect to complete the merger?

 

A:

As of the date of this proxy statement/prospectus, the merger is expected to be completed by the end of the first quarter of 2010. However, no assurance can be provided as to when or if the merger will occur. The required votes of PBG’s stockholders to adopt the merger agreement at the special meeting, as well as the necessary regulatory consents and approvals, must first be obtained and certain other conditions specified in the merger agreement must be satisfied or, to the extent permissible, waived.

 

Q:	Is completion of the merger subject to any conditions?

 

A:

Yes. In addition to approval of the proposal to adopt the merger agreement by (i) a majority of the outstanding voting power of the shares of PBG common stock and PBG Class B common stock entitled to vote, voting as a single class, and (ii) a majority of the votes cast by the holders of outstanding shares of PBG common stock entitled to vote, voting separately as a class, completion of the merger requires the receipt of the necessary regulatory consents and approvals, and the satisfaction or, to the extent permissible, waiver, of other conditions specified in the merger agreement. The completion of the merger is not conditioned upon completion of the PAS merger.

 

Q:	Am I entitled to appraisal rights?

 

A:

Yes. Under Delaware law, record holders of PBG common stock who do not vote in favor of the proposal to adopt the merger agreement will be entitled to seek appraisal rights in connection with the merger, and if the merger is completed, obtain payment in cash equal to the fair value of their shares of PBG common stock as determined by the Court of Chancery of the State of Delaware, instead of the merger consideration. To exercise your appraisal rights, you must strictly follow the procedures prescribed by Delaware law. These

 

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procedures are summarized in this proxy statement/prospectus. In addition, the text of the applicable provisions of Delaware law is included as Appendix D to this proxy statement/prospectus. Failure to strictly comply with these provisions will result in a loss of the right of appraisal.

 

Q:	What do I need to do now?

 

A:

After you have carefully read and considered the information presented in this proxy statement/prospectus, you may vote by mail, by telephone, through the Internet or by attending the special meeting and voting in person. If you choose to vote by mail, you should complete, date, sign and promptly return the enclosed proxy card in the enclosed postage-prepaid envelope so that your shares are represented at the special meeting. If you are a record holder you will separately receive an election form and letter of transmittal and instructions that you can complete if you want to elect cash as the form of consideration that you receive and if you hold your PBG shares in “street name” through a broker or other financial institution and you wish to make an election to receive cash, you will receive or should seek instructions from the institution holding your shares concerning how to make your election. Record holders may also choose to complete the optional cash allocation addendum to the election form and letter of transmittal if you wish to elect to designate the priority in which your shares are to be exchanged for cash.

 

Q:	When should I send in my stock certificates?

 

A:

If you make a cash election, you must send the stock certificates representing the shares of PBG common stock with respect to which you have made a cash election only with your completed election form and letter of transmittal. Do not send in your stock certificates until you have received and completed an election form and letter of transmittal. If you do not make a cash election with respect to all of your shares, you will receive a letter of transmittal from the exchange agent promptly after the completion of the merger with instructions for sending in your stock certificates.

 

Q:	What if I cannot locate my stock certificates?

 

A:

If a certificate for PBG common stock has been lost, stolen or destroyed, the exchange agent will issue the consideration properly payable under the merger agreement upon receipt of appropriate evidence as to that loss, theft or destruction, appropriate evidence as to the ownership of that certificate by the claimant, and appropriate and customary indemnification. The posting of a bond in a reasonable amount may also be required.

 

Q:	Who can I call with questions about the special meeting or the merger or to obtain additional information about PepsiCo and PBG?

 

A:	You may contact PBG’s proxy solicitor, Morrow & Co., LLC, at 1-800-607-0088 (from the United States or Canada) (banks and brokerage firms call toll-free 1-800-662-5200).

 

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SPECIAL FACTORS

General

This document is being provided to holders of PBG common stock in connection with the solicitation of proxies by the PBG Board to be voted at the special meeting, and at any adjournments or postponements of such meeting. At the special meeting, PBG will ask its stockholders to vote upon a proposal to adopt the Agreement and Plan of Merger dated as of August 3, 2009, as amended from time to time, among PepsiCo, PBG and Metro, and any other matters that are properly brought before the meeting.

The merger agreement provides for the merger of PBG with and into Metro, with Metro continuing as the surviving corporation. A copy of the merger agreement is attached as Appendix A to this proxy statement/prospectus. You are urged to read the merger agreement in its entirety because it is the legal document that governs the merger. For additional information about the merger, see “The Merger Agreement—Structure of the Merger” beginning on page [—] of this proxy statement/prospectus.

The PAS Merger

Concurrently with the entry into the merger agreement, PepsiCo, PAS and Metro entered into the PAS merger agreement, pursuant to which PAS will be merged with and into Metro, with Metro as the surviving corporation. Concurrently with the filing of this proxy statement/prospectus, PepsiCo and PAS are filing a proxy statement/prospectus in connection with the PAS merger that will be mailed to stockholders of PAS. The PAS merger is a separate transaction. Completion of the merger is not conditioned upon completion of the PAS merger. See “The PAS Merger” beginning on page [—] of this proxy statement/prospectus.

Background of the Merger

As part of the continuous monitoring and evaluation of its business performance and planning, PepsiCo, among other things, regularly monitors competitors’ activities, considers its own business lines, and evaluates potential strategic options and transactions, including with respect to its relationships with its bottlers. In connection with this monitoring and evaluation, since the initial public offering of PBG in 1999 and the merger of the former PepsiAmericas, Inc. with Whitman Corporation in 2000, PepsiCo has considered, from time to time, numerous strategic options and transactions with respect to its relationships with PBG and PAS.

After PBG’s initial public offering in 1999, PepsiCo retained a non-controlling equity interest in PBG representing approximately 35.4% of the shares of PBG common stock and 100% of shares of PBG Class B common stock. As of the date of this proxy statement/prospectus, PepsiCo and its subsidiaries collectively own approximately 32.2% of the outstanding shares of PBG common stock and 100% of the shares of PBG Class B common stock, representing approximately 39.2% of the combined voting power of the outstanding shares of common stock and Class B common stock of PBG. PepsiCo also owns approximately 6.6% of the outstanding shares of Bottling Group, LLC, PBG’s principal operating subsidiary.

In May 1999, PepsiCo combined certain of its bottling operations with Whitman Corporation, retaining a non-controlling ownership interest of approximately 38%. In October 1999, PepsiCo formed a business venture with Pohlad Companies, through which PepsiCo retained a non-controlling ownership interest of approximately 24% in the former PepsiAmericas, Inc. In November 2000, the former PepsiAmericas, Inc. merged with Whitman Corporation. After that merger, PepsiCo owned approximately 37% of the combined bottler which then changed its named to PAS. As of the date of this proxy statement/prospectus, PepsiCo and its subsidiaries (including Metro) own approximately 43.4% of the outstanding common stock of PAS.

PBG and PAS are party to several commercial agreements with PepsiCo, under which, among other things, PBG and PAS are granted the exclusive right to manufacture, sell and distribute beverage products of PepsiCo in authorized containers and to use the related trade names and trademarks in specified territories. For additional details and information concerning the Master Bottling Agreement, see “Related Party Transactions” beginning

 

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on page [—] of this proxy statement/prospectus. In addition, John C. Compton and Cynthia M. Trudell, PepsiCo employees, are members of the PBG Board. See “Directors and Executive Officers of PBG” beginning on page [—] of this proxy statement/prospectus.

Based on its continuous monitoring and evaluation of its business performance and planning, PepsiCo concluded that the changing dynamics of the North American liquid refreshment beverage business required a more flexible, efficient and competitive system that would enhance performance and drive growth across the full range of PepsiCo beverage brands. The changing dynamics of the North American liquid refreshment beverage business include the emergence of new competitors, increasing consolidation of retail customers, the emergence of non-carbonated drinks, which have different economics and different distribution systems than carbonated soft drinks, and an increase in product diversification as health and wellness offerings become a larger part of the beverage portfolio. As a result, PepsiCo began to consider various strategic options and transactions, including, among other things, possible business combinations, resetting the terms and conditions of PepsiCo’s relationship with either or both of PBG and PAS and purchasing some or all of the shares that it did not already own of either or both of PBG and PAS. In certain cases, PepsiCo’s internal deliberations on these matters led to preliminary discussions with and among senior management of PBG and PAS and their respective representatives, including discussions between senior management of PepsiCo and PBG in March 2009 regarding the potential synergy opportunities and other benefits of transforming the Pepsi bottling system, although none subsequently led to an agreement.

On November 20, 2008, Indra K. Nooyi, PepsiCo’s Chairman and Chief Executive Officer, met with representatives of Centerview Partners and BofA Merrill Lynch to discuss the merits of various strategic options for PepsiCo, including the potential acquisitions of PBG and PAS. Shortly after the meeting, PepsiCo began considering the merits of the potential acquisitions of PBG and PAS. On or about November 23, 2008, Ms. Nooyi requested that the Centerview Partners and BofA Merrill Lynch representatives further evaluate the potential acquisitions.

During the period from November 20, 2008 to January 9, 2009, senior executives of PepsiCo participated in several meetings and teleconferences with representatives of Centerview Partners, BofA Merrill Lynch and Davis Polk & Wardwell LLP, legal advisor to PepsiCo, which is referred to in this proxy statement/prospectus as Davis Polk, to discuss PepsiCo’s strategic options, including the potential acquisitions of PBG and PAS. In particular, senior officers of PepsiCo met with representatives of Centerview Partners, BofA Merrill Lynch and Davis Polk on December 6, 2008 to discuss tactical, strategic and logistical issues associated with the potential acquisitions by PepsiCo of PBG and PAS. From December 12, 2008 through January 3, 2009, representatives of PepsiCo and its legal and financial advisors held periodic meetings in person and via teleconference to discuss the potential acquisitions by PepsiCo of PBG and PAS. During this period, PepsiCo senior management began to believe that the potential acquisitions of PAS and PBG were superior to certain of its other strategic options with respect to PepsiCo’s bottling system. In particular, PepsiCo senior management thought that the potential acquisitions were less complicated and a more robust way to address the changing dynamics of the North American liquid refreshment beverage business than its other strategic options with respect to PAS and PBG, including resetting the terms and conditions of PepsiCo’s relationships with PAS and PBG.

On December 22, 2008 and December 23, 2008, certain members of PepsiCo’s board of directors, together with representatives of PepsiCo’s financial and legal advisors, met to discuss, among other things, the potential acquisitions of PBG and PAS. On January 2, 2009 and January 3, 2009, representatives of PepsiCo and its legal and financial advisors participated in various meetings and teleconferences relating to the potential acquisitions of PBG and PAS in preparation for a PepsiCo board of directors meeting scheduled for January 4, 2009.

At a meeting of PepsiCo’s board of directors on January 4, 2009, the PepsiCo board of directors, among other things, received presentations from PepsiCo’s senior executives and representatives of Centerview Partners and BofA Merrill Lynch regarding the potential acquisitions of PBG and PAS. At this meeting, PepsiCo’s senior management summarized for the board the future importance of the North American Bottling business to PepsiCo, the limited benefits of the existing franchise model, and management’s view that three strategic options were available to PepsiCo: an acquisition of PAS and PBG, a merger between PAS and PBG or a restructuring of PepsiCo’s relationship with PAS and PBG. Management then recommended pursuing an acquisition of PAS and

 

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PBG because it would produce a leaner, simpler, more flexible enterprise and improve PepsiCo’s operating and strategic effectiveness. Management further identified an estimated $150 million in synergies and possibly an additional $50 to $150 million in other potential synergies that could result from the acquisitions. Representatives of Centerview Partners and BofA Merrill Lynch then presented a preliminary financial analysis of an acquisition of PBG and PAS. See “—Opinion of PepsiCo’s Financial Advisors—Preliminary Financial Analyses” beginning on page [—] of this proxy statement/prospectus. Management recommended that PepsiCo pursue acquiring both PBG and PAS at the same premium (although no specific price was proposed), payable 50% in cash and 50% in stock based upon a fixed exchange ratio, although management stressed that PepsiCo would need to retain flexibility on each of these points and could end up with differing premiums, an all cash or all stock deal or a fixed price exchange ratio (subject to a collar). Management recommended that the two transactions be conditioned upon each other and that each acquisition be subject to approval by a special committee of the target’s board. Management stressed that PepsiCo should communicate that under no circumstances would PepsiCo be willing to entertain a sale of or otherwise dispose of PepsiCo’s stake in PAS or PBG or vote its shares in favor of another transaction. Following a discussion, the PepsiCo board instructed management to continue to evaluate the potential acquisitions. Representatives of PepsiCo and its financial and legal advisors met on January 6, 2009 to discuss PepsiCo’s strategic options, but on or about January 9, 2009 management determined instead to focus its attention on its business and strategic matters unrelated to an acquisition of PAS and PBG. PepsiCo and its advisors did not meet again after that meeting to discuss the potential acquisitions of PBG and PAS until March 2009.

On or around March 18, 2009, as part of its monitoring and evaluation of its business performance and planning, PepsiCo’s management determined to reconsider the potential acquisitions of PBG and PAS. On March 20, 2009, PepsiCo’s board of directors held a meeting at which the independent directors of PepsiCo’s board of directors met with Ms. Nooyi and discussed, among other things, PepsiCo’s recent evaluation of its business performance and planning. During this discussion, Ms. Nooyi and the independent directors determined that PepsiCo should resume its consideration of the potential acquisitions of PAS and PBG.

From April 1, 2009 through April 19, 2009, senior executives of PepsiCo periodically met with representatives of Centerview Partners, BofA Merrill Lynch and Davis Polk to discuss the potential acquisitions of PBG and PAS. On April 10, 2009, certain members of the PepsiCo board of directors, senior management of PepsiCo and representatives of PepsiCo’s financial and legal advisors held a strategy session to discuss the potential acquisitions of PBG and PAS. From April 14, 2009 through April 19, 2009, representatives of PepsiCo and its financial and legal advisors held several meetings to discuss the potential acquisitions of PBG and PAS. These discussions included review of draft letters to the board of directors of PBG and the board of directors of PAS and various communications materials.

On the morning of April 19, 2009, the PepsiCo board of directors met and, among other things, received presentations from PepsiCo’s senior executives and representatives of Centerview Partners and BofA Merrill Lynch regarding the potential acquisitions. At this meeting, PepsiCo management summarized for the board the future importance of the North American Bottling business to PepsiCo, the significant changes in the North American beverage markets that were placing pressure on PepsiCo’s North American beverage business and limiting system profit growth, the limited benefits of the existing franchise model and significant costs of system misalignment and management’s view that an acquisition of PAS and PBG was the recommended way to address these issues instead of a merger between PAS and PBG or a restructuring of PepsiCo’s relationship with PAS and PBG because an acquisition of PAS and PBG would produce a leaner, simpler, more flexible enterprise. Management explained that integration with PAS and PBG would improve operating and strategic effectiveness, improve competitiveness and provide strategic flexibility, and identified more than $200 million in potentially available deal synergies. Management then discussed with the PepsiCo board the risks and operational and organizational challenges that would be present in the transactions and outlined an approach to achieve a smooth integration of the businesses. PepsiCo’s board of directors and management and PepsiCo’s financial advisors also discussed the impact of the proposed transactions on PepsiCo’s earnings per share, earnings per share growth, earnings before interest and taxes growth and top-line revenue growth, as well as the impact of the proposed transactions on the business mix and margins of PepsiCo’s business and the impact to PepsiCo’s return on invested capital, internal rate of return and leverage. PepsiCo’s board of directors and management and PepsiCo’s financial advisors also discussed the pro forma impact of the potential synergies identified by PepsiCo

 

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management. Management then described to the board recommended transaction terms, including that PepsiCo acquire both PBG and PAS at the same premium, payable 50% in cash and 50% in stock based upon a fixed exchange ratio, although management stressed that PepsiCo would need to retain flexibility on each of these points and could end up with differing premiums, an all cash transaction or a transaction with a cash election mechanism, or a fixed price exchange ratio (subject to a collar). Management recommended that the two transactions be conditioned upon each other and that each acquisition be subject to approval by a special committee of the target’s board. Management stressed that PepsiCo should clearly communicate that under no circumstances would PepsiCo be willing to entertain a sale of or otherwise dispose of PepsiCo’s stake in PAS or PBG or vote its shares in favor of another transaction. Following discussion, the PepsiCo board of directors authorized PepsiCo’s management to make a proposal to acquire the outstanding shares of PBG that it did not already own for $14.75 in cash and 0.283 shares of PepsiCo common stock per PBG share and to make a proposal to acquire the outstanding shares of PAS that it did not already own for $11.64 in cash and 0.223 shares of PepsiCo common stock per PAS share.

Later on April 19, 2009, Ms. Nooyi separately called Mr. Eric J. Foss, Chairman and Chief Executive Officer of PBG, and Mr. Robert C. Pohlad, Chairman and Chief Executive Officer of PAS, to inform them that PepsiCo intended to make the proposals that were approved by the PepsiCo board of directors.

Shortly thereafter, PepsiCo delivered the following letter to the board of directors of PBG:

April 19, 2009

Board of Directors

The Pepsi Bottling Group, Inc.

One Pepsi Way

Somers, New York 10589

Attention: Eric J. Foss, Chairman and Chief Executive Officer

Gentlemen and Ladies:

I am pleased to write on behalf of the Board of Directors of PepsiCo, Inc. to propose a business combination of PepsiCo and The Pepsi Bottling Group (PBG).

We propose to acquire all of the outstanding shares of PBG common stock not already owned by us at a value of $29.50 per share. Based on current market prices, our proposal represents a 17.1 percent premium over the closing price of the shares of PBG on April 17, 2009 and a 36.0 percent premium over the 30 day average closing price of PBG. At closing, each share of PBG common stock would be converted into $14.75 in cash plus 0.283 shares of PepsiCo common stock, which has a value of $14.75 based on the closing price of PepsiCo common stock of $52.13 on April 17, 2009.

PepsiCo is considering a combination from a strong position financially with continuing solid business fundamentals. We have a strong portfolio, a global footprint, a leadership position in growing categories and an organization committed to excellence across a range of strategic, operational and financial metrics. Our offer includes stock consideration because we believe PBG’s shareholders will benefit from PepsiCo’s long-term equity performance.

PepsiCo has a long history of delivery of industry-leading operating performance. As you know, we have made the transformation of our North American beverage business a top priority. We are excited about the transformation already underway, building on our existing portfolio of distinguished brands through innovation in product, packaging and marketing—while improving our cost structure. The good relationship with PBG has been essential to this overall effort, and we appreciate both the constructive dialogue and the alignment we have reached on our executional plans.

We believe that a combination with PBG would help PepsiCo continue this record of strong performance:

 

•

Build upon organizational agility to manage a portfolio of brands for growth against a backdrop of changing Liquid Refreshment Beverage dynamics;

 

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•

Provide flexibility across go-to-market systems to optimize revenue, productivity and costs by channel and customer;

 

•

Facilitate rapid decision-making and speed-to-market; and

 

•

Create a winning operating culture across the entire system. PepsiCo and PBG both share a common heritage and value system, and we believe a combination will build upon our recent successes to accelerate the transformation of our beverages business.

For these reasons, the combined beverage business would enhance our “Power of One” vision and contribute to a simplified, streamlined and agile beverage system. We at PepsiCo have a tremendous amount of respect for PBG, its superb operating abilities, and its dedicated employees. PBG has built a very strong business over the last decade and is an important partner to PepsiCo.

We have also sent the Board of Directors of PepsiAmericas, Inc. an offer letter. Our willingness to proceed with this proposal is conditioned on the negotiation of definitive documentation with respect to the proposal in that letter (and the ultimate consummation of that transaction), and our willingness to proceed with the proposal in that letter is similarly conditioned on the negotiation of definitive documentation with respect to this proposal (and the ultimate consummation of this transaction).

For the avoidance of doubt, while PepsiCo is interested in this proposed transaction, as a shareholder of PBG, we would not sell or otherwise dispose of our PBG shares in, or vote our PBG shares in favor of, another transaction.

Our proposal is also subject to the negotiation of a definitive merger agreement and satisfaction of the conditions set forth therein, and our having the opportunity to conduct certain limited and confirmatory due diligence. In addition, because a portion of the aggregate merger consideration would consist of PepsiCo common stock, we would provide PBG the opportunity to conduct appropriate limited due diligence with respect to PepsiCo. We are preparing a draft merger agreement that we will provide to you shortly. Our familiarity with PBG will enable us to finalize the merger agreement in an expedited manner.

We expect that PBG will establish a special committee of directors independent from us (or rely upon the Affiliated Transactions Committee) to consider our proposal on behalf of its shareholders and to recommend to its Board of Directors whether to approve the proposal, with legal and financial advisors to assist in its review. We would welcome the opportunity to present our proposal to the special committee as soon as possible.

Because we wish to be sure that our respective shareholders are fully informed about the proposal we are making, our intention is to publicly release the text of this letter before the market opens tomorrow morning.

For the avoidance of doubt, the offer in this letter is an expression of intent only, and shall not create any legally binding obligations. No such obligations shall arise unless and until execution and delivery of mutually acceptable definitive documentation by the parties thereto.

Our entire team looks forward to working with the special committee and its legal and financial advisors to complete a transaction that is attractive to PBG’s non-PepsiCo shareholders. Should you have any questions, please contact us.

Very truly yours,

Indra K. Nooyi

 

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At the same time, PepsiCo delivered the following letter to the board of directors of PAS:

April 19, 2009

Board of Directors

PepsiAmericas, Inc.

4000 RBC Plaza

60 South Sixth Street

Minneapolis, Minnesota 55402

Attention: Robert C. Pohlad, Chairman and Chief Executive Officer

Gentlemen and Ladies:

I am pleased to write on behalf of the Board of Directors of PepsiCo, Inc. to propose a business combination of PepsiCo and PepsiAmericas.

We propose to acquire all of the outstanding shares of PepsiAmericas common stock not already owned by us at a value of $23.27 per share. Based on current market prices, our proposal represents a 17.1 percent premium over the closing price of the shares of PepsiAmericas on April 17, 2009 and a 33.4 percent premium over the 30 day average closing price of PepsiAmericas. At closing, each share of PepsiAmericas common stock would be converted into $11.64 in cash plus 0.223 shares of PepsiCo common stock, which has a value of $11.63 based on the closing price of PepsiCo common stock of $52.13 on April 17, 2009.

PepsiCo is considering a combination from a strong position financially with continuing solid business fundamentals. We have a strong portfolio, a global footprint, a leadership position in growing categories and an organization committed to excellence across a range of strategic, operational and financial metrics. Our offer includes stock consideration because we believe PepsiAmericas’ shareholders will benefit from PepsiCo’s long-term equity performance.

PepsiCo has a long history of delivery of industry-leading operating performance. As you know, we have made the transformation of our North American beverage business a top priority. We are excited about the transformation already underway, building on our existing portfolio of distinguished brands through innovation in product, packaging and marketing - while improving our cost structure. The good relationship with PepsiAmericas has been essential to this overall effort, and we appreciate both the constructive dialogue and the alignment we have reached on our executional plans.

We believe that a combination with PepsiAmericas would help PepsiCo continue this record of strong performance:

 

•

Build upon organizational agility to manage a portfolio of brands for growth against a backdrop of changing Liquid Refreshment Beverages dynamics;

 

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Provide flexibility across go-to-market systems to optimize revenue, productivity and costs by channel and customer;

 

•

Facilitate rapid decision-making and speed-to-market; and

 

•

Create a winning operating culture across the entire system. PepsiCo and PepsiAmericas both share a common heritage and value system, and we believe a combination will build upon our recent successes to accelerate the transformation of our beverages business.

For these reasons, the combined beverage business would enhance our “Power of One” vision and contribute to a simplified, streamlined and agile beverage system. We at PepsiCo have

 

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a tremendous amount of respect for PepsiAmericas, its superb operating abilities, and its dedicated employees. PepsiAmericas has built a very strong business over the last decade and is an important partner to PepsiCo.

We have also sent the Board of Directors of The Pepsi Bottling Group, Inc. an offer letter. Our willingness to proceed with this proposal is conditioned on the negotiation of definitive documentation with respect to the proposal in that letter (and the ultimate consummation of that transaction), and our willingness to proceed with the proposal in that letter is similarly conditioned on the negotiation of definitive documentation with respect to this proposal (and the ultimate consummation of this transaction).

For the avoidance of doubt, while PepsiCo is interested in this proposed transaction, as a shareholder of PepsiAmericas, we would not sell or otherwise dispose of our PepsiAmericas shares in, or vote our PepsiAmericas shares in favor of, another transaction.

Our proposal is also subject to the negotiation of a definitive merger agreement and satisfaction of the conditions set forth therein, and our having the opportunity to conduct certain limited and confirmatory due diligence. In addition, because a portion of the aggregate merger consideration would consist of PepsiCo common stock, we would provide PepsiAmericas the opportunity to conduct appropriate limited due diligence with respect to PepsiCo. We are preparing a draft merger agreement that we will provide to you shortly. Our familiarity with PepsiAmericas will enable us to finalize the merger agreement in an expedited manner.

We expect that PepsiAmericas will establish a special committee of directors independent from us (or rely upon the Affiliated Transactions Committee) to consider our proposal on behalf of its shareholders and to recommend to its Board of Directors whether to approve the proposal, with legal and financial advisors to assist in its review. We would welcome the opportunity to present our proposal to the special committee as soon as possible. Our proposal is conditioned upon the approval of a majority of the directors of PepsiAmericas that are independent from us.

Because we wish to be sure that our respective shareholders are fully informed about the proposal we are making, our intention is to publicly release the text of this letter before the market opens tomorrow morning. We will also amend our Schedule 13D filing with respect to shares of PepsiAmericas.

For the avoidance of doubt, the offer in this letter is an expression of intent only, and shall not create any legally binding obligations. No such obligations shall arise unless and until execution and delivery of mutually acceptable definitive documentation by the parties thereto.

Our entire team looks forward to working with the special committee and its legal and financial advisors to complete a transaction that is attractive to PepsiAmerica’s non-PepsiCo shareholders. Should you have any questions, please contact us.

Very truly yours,

Indra K. Nooyi

Prior to the opening of the trading market in New York on April 20, 2009, PepsiCo issued a press release announcing the proposals reflected in the letters to PBG and PAS. The press release noted that both proposals were subject to the completion of definitive merger agreements and limited confirmatory due diligence and that each of the proposals was cross-conditioned upon the successful completion of the other transaction. In addition, PepsiCo indicated that it expected that PBG and PAS would each rely upon a committee of independent directors to review the proposals. PepsiCo also filed an amendment to its Schedule 13D filing with the SEC disclosing its April 19 proposal to acquire PAS. Later that day, PBG issued a press release stating that it had received a non-

 

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binding proposal from PepsiCo and that its board of directors would review the proposal carefully and respond in due course. Also on April 20, 2009, PAS issued a press release stating that it had received a non-binding proposal from PepsiCo and that its board of directors would review the proposal carefully and determine the appropriate response in due course and respond in due course.

The PBG Board held a telephonic meeting on April 20, 2009, which was attended by certain members of PBG’s management, as well as representatives from Morgan Stanley and Cravath, Swaine & Moore LLP, which is referred to in this proxy statement/prospectus as Cravath, to discuss PepsiCo’s April 19th proposal and potential next steps in response thereto. Directors Compton and Trudell were not present at the meeting. At that meeting, representatives from Cravath reviewed with the PBG Board its fiduciary obligations under applicable law and discussed with the PBG Board the potential formation of a special committee to evaluate PepsiCo’s proposal. Representatives from Morgan Stanley reviewed the terms of PepsiCo’s proposal, including the fact that it was conditioned upon the successful completion of the proposed transaction in respect of PAS, which was considered by Morgan Stanley to be an implicit acknowledgement by PepsiCo that each company should get the synergy benefits of PepsiCo’s proposed combination. However, the PBG Board recognized that the cross-conditional nature of the proposals created uncertainty. After discussion, the PBG Board formed a Special Committee consisting of the following five independent directors: Barry H. Beracha, Ira D. Hall, Susan D. Kronick, Blythe J. McGarvie and Javier G. Teruel. The PBG Special Committee was formed for the purpose of:

 

•

evaluating PepsiCo’s proposal;

 

•

making recommendations to the PBG Board regarding PepsiCo’s proposal and other potential actions; and

 

•

if determined appropriate by the PBG Board, negotiating a transaction in respect of PepsiCo’s proposal or other alternative transactions.

Mr. Hall was appointed Chairperson of the PBG Special Committee. PBG retained Morgan Stanley to serve as financial advisor after considering Morgan Stanley’s credentials as a financial advisor as well as its potential conflicts of interest as a result of its provision of financial advisory and financing services to PepsiCo in connection with certain of PepsiCo’s share repurchase programs and debt financing transactions. The PBG Special Committee’s authority to negotiate and potentially implement a transaction in respect of PepsiCo’s proposal was limited by the fact that the PBG Board would retain the right to approve or disapprove of any recommendation by the PBG Special Committee. As compensation for their service on the PBG Special Committee, the Chairperson received a retainer of $35,000 and the PBG Special Committee members each received retainers of $20,000. In addition, the Chairperson and the members of the PBG Special Committee are entitled to $1,500 per meeting attended. The compensation for the Chairperson and members of the PBG Special Committee was not, and is not, contingent upon the adoption of the merger agreement and the completion of the merger or any other transaction.

On April 24, PAS announced that it had formed PAS’ transactions committee consisting of all independent directors to review the proposal made by PepsiCo to acquire PAS and that it had retained Goldman Sachs, as its financial advisor, and Briggs and Morgan, P.A., which is referred to in this proxy statement/prospectus as Briggs and Morgan, and Sullivan & Cromwell LLP, which is referred to in this proxy statement/prospectus as Sullivan & Cromwell, as its legal advisors.

Shortly after the announcement of the proposals, several putative stockholder class action lawsuits were filed against various combinations of PepsiCo, PBG, PAS and/or the individual members of the boards of directors of PBG and PAS challenging the proposals and the proposed acquisitions in the Court of Chancery of the State of Delaware, the District Court of the State of Minnesota and the Supreme Court of the State of New York, Counties of Westchester and New York. Ultimately, a total of fourteen putative stockholder class action complaints were filed challenging the proposals and the proposed acquisitions. See “—Certain Litigation Matters” beginning on page [—] of this proxy statement/prospectus.

 

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On April 28, 2009, the PBG Special Committee met to evaluate PepsiCo’s proposal and to determine which, if any, recommendations should be made to the PBG Board. Representatives from Cravath reviewed with the PBG Special Committee the then-current defensive profiles of PBG and potential defensive enhancements available to PBG, including the adoption of a stockholder rights plan and amendments to PBG’s Bylaws providing for additional notice and informational requirements for stockholder actions. Members of PBG’s management and representatives of Morgan Stanley reviewed with the PBG Special Committee PBG’s historical and projected financial performance, potential cost savings available to PBG on a stand-alone basis, potential synergies available in connection with PepsiCo’s proposed acquisition of PBG and PAS, certain strategic alternatives available to PBG, and potential responses to, and next steps regarding, PepsiCo’s proposal. The strategic alternatives considered by the PBG Special Committee included PBG continuing to execute on its current business plan (including consolidating smaller bottlers and seeking further North American growth), PBG engaging in a strategic transaction with PAS, and PBG seeking a sale of the entire company to a third party. Morgan Stanley also expressed its view that the PepsiCo proposal failed to reflect the intrinsic value of PBG, provided an inadequate premium, significantly understated synergies and, due to the cross-conditional nature of the transaction, could result in circular negotiations. Following discussion, the PBG Special Committee unanimously concluded that it should recommend to the PBG Board:

 

•

that it reject PepsiCo’s proposal as grossly inadequate;

 

•

that it authorize a stockholder rights plan;

 

•

that PBG’s Bylaws be amended to provide for additional advance notice and informational requirements for stockholder actions; and

 

•

that the PBG compensation committee should approve certain retention, change-in-control, severance and other similar arrangements for PBG’s executive officers.

Under the stockholder rights plan recommended by the PBG Special Committee, the PBG Board would authorize and declare a dividend of one right per each share of PBG common stock and PBG Class B common stock to purchase 1/1000th of a share of Series A Preferred Stock of PBG, subject to certain adjustments. These rights would not be exercisable or separately transferable from the PBG common stock or PBG Class B common stock until any stockholder (other than PepsiCo and its affiliates) acquired beneficial ownership of 15% or more of the outstanding PBG common stock, or PepsiCo (or its affiliates) acquired any additional shares of PBG common stock not owned by them on the date of the rights agreement. If either of the foregoing were to occur, the rights would separate from the PBG common stock and PBG Class B common stock and become exercisable, enabling each person other than the 15% stockholder or PepsiCo, as applicable, to purchase shares of PBG common stock or another security at 50% of market price. The rights would be redeemable by the PBG Board, and the rights agreement could be amended unilaterally by the PBG Board, at any time prior to the earlier of a person becoming an “acquiring person” (as defined in the rights agreement) and the expiration of the rights agreement.

The bylaw amendments recommended by the PBG Special Committee introduced a procedural requirement to the fixing of the record date for proposed stockholder actions by written consent by providing that the PBG Board would have 10 days to fix the record date from the date on which a request therefor was received. The proposed bylaw amendments provided that such record date would not be more than 10 days after the date of the adoption of such resolution. In addition, the bylaw amendments contained detailed notice and informational requirements for stockholder proposals at annual and special meetings and required that the same informational requirements applicable to stockholder proposals at annual or special meetings be fulfilled in the case of proposed stockholder actions by written consent.

The retention arrangements proposed by the PBG Special Committee would be effected by written retention agreements with PBG’s executive officers (John Berisford, Victor Crawford, Al Drewes, Eric Foss, Robert King, Yiannis Petrides and Steven Rapp). These retention agreements would provide for payments and benefits in the context of a termination of the executive’s employment by PBG without cause or a resignation by the executive for good reason, in each case during the two-year period following a change in control of PBG. Such payments

 

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and benefits would include cash severance of two times salary and target bonus for the year of termination, acceleration and settlement of equity awards, a pro-rated target annual bonus for the year of termination, reimbursement for the cost of up to two years’ of medical, dental and vision benefits, reimbursement up to $50,000 for the cost of outplacement services and, in certain circumstances, special early retirement benefits.

On April 30, 2009, the PBG compensation committee met and discussed the implementation of retention agreements with PBG’s executive officers. The compensation committee received advice from F.W. Cook & Co., Inc., its independent compensation consultant, regarding proposed terms of such arrangements. After discussion, the PBG compensation committee unanimously authorized retention arrangements with PBG’s executive officers pursuant to individual retention agreements to be entered into with each individual officer (and subject to review and approval of such final documentation).

Immediately following the PBG compensation committee meeting on April 30, 2009, the PBG Board convened a telephonic meeting at which the PBG Special Committee presented to the PBG Board its recommendations (discussed above) with respect to PepsiCo’s proposal. Directors Compton and Trudell were not present at the meeting. The PBG Board discussed the substance of the PBG Special Committee’s recommendations with Morgan Stanley and Cravath and, with respect to retention arrangements, with Mr. Hall, Chairman of the PBG compensation committee. At the meeting, Morgan Stanley delivered its opinion, delivered orally and subsequently confirmed in writing, to the effect that, as of April 30, 2009 and based on and subject to the assumptions, limitations and qualifications set forth in their opinion, the consideration to be received by PBG’s stockholders (other than PepsiCo and its affiliates) pursuant to PepsiCo’s proposal was inadequate from a financial point of view to such stockholders. Following discussion, the PBG Board determined to implement each of the PBG Special Committee’s recommendations described above. The PBG Board conditioned the effectiveness of these actions on PBG’s entry into definitive retention agreements with each of its executive officers, which occurred on May 3, 2009. The PBG Board also authorized the PBG Special Committee, together with PBG’s management, Morgan Stanley and Cravath, to engage in discussions and negotiations with PepsiCo and PAS with respect to PepsiCo’s proposal from time to time, as the PBG Special Committee deemed necessary and advisable, subject to approval by the PBG Board of the final terms of any transaction.

On the evening of May 3, 2009, Mr. Foss telephoned Ms. Nooyi to inform her that the PBG Board would be rejecting the PepsiCo Proposal, and that a press release would follow early the next morning. On May 4, 2009, the PBG Board delivered the following letter to Ms. Nooyi:

May 4, 2009

Indra Nooyi

Chairman and Chief Executive Officer

PepsiCo

700 Anderson Hill Road

Purchase, NY 10577

Dear Indra:

We are writing to respond to your proposal of April 19 to acquire all of the outstanding shares of common stock of The Pepsi Bottling Group, Inc. (“PBG”) not owned by PepsiCo. A Special Committee of the Board of Directors of PBG (“the Special Committee”), comprised entirely of independent directors, has carefully reviewed your proposal with the assistance of independent financial and legal advisors. Based on the unanimous recommendation of the Special Committee, the Board of Directors of PBG has concluded that the proposal is grossly inadequate and not in the best interests of PBG and its stockholders.

PepsiCo’s proposal substantially undervalues PBG for many reasons, including:

 

•

Opportunistic Timing: Your proposal was made shortly before the public release of PBG’s strong first quarter 2009 earnings on April 22, 2009. As you know, PBG exceeded

 

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Wall Street expectations for the quarter, raised its full-year guidance for earnings per share and operating free cash flow, and provided details of its plans to achieve over $250 million in cost and productivity savings in 2009 on a standalone basis.

 

•

Inadequate Value: The value of your proposal is substantially below PBG’s intrinsic value, as well as the value that would be implied by comparable transactions. Your offer is at virtually no premium to market given PBG’s first quarter earnings and upward revision to full-year EPS and operating free cash flow guidance. Transaction premiums, especially those including cash consideration, have been very substantial since the market dislocation last September.

 

•

Understated Synergies: We believe you have substantially understated the synergies that would be available through the combination you have proposed. As you know, PBG has thoroughly analyzed the savings and efficiencies that could be achieved through a transformation of the Pepsi system. Based on our analysis, we are confident that readily achievable synergies are multiples of the $200 million you referenced.

PBG values its longstanding relationship with PepsiCo, but the PBG Board will not agree to a proposal which does not reflect the true value of PBG. Accordingly, based on the Special Committee’s unanimous recommendation, the Board has taken customary steps to protect PBG and its stockholders from opportunistic acquisition attempts.

We remain confident that PBG’s continuing efforts to strengthen its brand portfolio, further improve its performance through operational excellence, and capitalize on geographic growth opportunities position PBG to create substantial value well into the future.

Sincerely,

 

Eric J. Foss Chairman of the Board and CEO The Pepsi Bottling Group, Inc.		Ira D. Hall Chairman, Special Committee of the Board of Directors The Pepsi Bottling Group, Inc.

Prior to the opening of the trading market in New York on May 4, 2009, PBG issued a press release announcing the PBG Board’s rejection of PepsiCo’s proposal and containing a text of the letter. The press release stated that PBG had adopted a stockholder rights plan and declared a dividend of one right for each share of PBG’s common stock outstanding as of the close of business on May 14, 2009, approved retention agreements for certain key employees and amended PBG’s bylaws to include notice and informational requirements for stockholder proposals and stockholder action by written consent.

On May 6, 2009, at a regularly scheduled meeting of the board of directors of PepsiCo, PepsiCo senior management, together with Centerview Partners, BofA Merrill Lynch and Davis Polk, updated the PepsiCo directors as to the status of the proposals to acquire PBG and PAS, including that the PBG Board had rejected PepsiCo’s proposal to acquire PBG and adopted the measures described in the preceding paragraph.

Also on May 7, 2009, PAS announced that its board of directors, based on the recommendation of the PAS transactions committee, had unanimously determined that PepsiCo’s proposal to acquire PAS was not acceptable or in the best interests of PAS’ stockholders, and that PAS had amended its existing stockholder rights plan to extend the expiration date of the plan from May 20, 2009 to May 20, 2010. The press release also stated PAS’ belief that the proposal significantly undervalued the strategic benefits of system consolidation, did not reflect the value of PAS’ strengths and stand-alone strategies, as evidenced by PAS’ strong first quarter results, and substantially undervalued the synergies that could be obtained in the proposed transaction.

 

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On May 7, 2009, in response to the announcements of PBG rejecting PepsiCo’s proposal to acquire PBG and PAS rejecting PepsiCo’s proposal to acquire PAS, PepsiCo issued a press release reiterating its belief that it had made full and fair offers for both companies that were in the best interests of PBG, PAS and their respective stockholders and represented a premium of 17.1% over the closing price of PBG common stock and PAS common stock on April 17, 2009. The release also reported that, compared with the 30-day average closing prices, the offers represented a premium of 36% for PBG and 33.4% for PAS.

On May 11, 2009, PepsiCo, along with Mr. Compton and Ms. Trudell (PepsiCo employees who are also members of PBG’s board of directors), filed a complaint against PBG and the members of PBG’s board of directors (other than Mr. Compton and Ms. Trudell) in the Court of Chancery of the State of Delaware. The complaint alleged that PBG’s board of directors had held a board meeting without providing notice to Mr. Compton and Ms. Trudell, that the defensive measures approved at that meeting and announced on May 4, 2009 were void and that the stockholder rights plan adopted in the meeting was procedurally and substantively infirm.

On May 13, 2009, Ms. Nooyi sent a letter to the PBG Board reiterating PepsiCo’s belief that the retention agreements announced on May 4, 2009 were improperly adopted and void.

On May 14, 2009, the PBG Special Committee convened a meeting (at which directors Linda Alvarado and John Quelch attended by invitation) to discuss the May 11th complaint filed by PepsiCo, Mr. Compton and Ms. Trudell, as well as Ms. Nooyi’s May 13th letter. Representatives from Morgan Stanley and Cravath discussed with the PBG Special Committee potential responses to the May 11th complaint, the May 13th letter, and other potential scenarios and next steps relating to PepsiCo’s proposal.

The PBG Board convened a special meeting on May 18, 2009, and considered and approved de novo the substance of the actions previously taken at the PBG Board’s April 30, 2009 meeting. Directors Compton and Trudell were present at the meeting’s opening, then recused themselves.

The PBG Special Committee met on May 18, 2009 (following the PBG Board meeting), and again on May 26, 2009 and June 1, 2009. At these meetings the Special Committee reviewed with management, Morgan Stanley and Cravath investor reactions to the PBG Board’s rejection of PepsiCo’s proposal, potential scenarios relating to PepsiCo’s proposal and a draft of investor presentation materials to accompany PBG’s second quarter earnings release. The potential scenarios considered by the PBG Special Committee included PepsiCo’s commencement of an exchange offer, PBG and PepsiCo entering into private negotiations, PepsiCo continuing to pursue its lawsuit against PBG and the PBG Board and/or taking other similar actions, PepsiCo requesting a special meeting of PBG stockholders, the announcement of a PepsiCo transaction with PAS, and PepsiCo rescinding its proposal.

The PBG Special Committee discussed the possibility that if PBG continued to act independently, the cross-conditional nature of PepsiCo’s offer might result in circular negotiations, particularly if PAS negotiated a deal with PepsiCo first. The PBG Special Committee believed that, in such a situation, PepsiCo might take the position that the PAS deal created a value ceiling applicable to its offer for PBG common stock. At the May 18 meeting, Morgan Stanley reiterated its opinion first delivered on April 30, 2009, that, as of May 18, 2009, and based on and subject to the assumptions, limitations and qualifications set forth in their opinion, the consideration to be received by PBG’s stockholders (other than PepsiCo and its affiliates) pursuant to PepsiCo’s proposal was inadequate from a financial point of view to such stockholders.

On May 18, 2009 and May 22, 2009, the Chairman of PAS’ transactions committee, together with the Chairman of PAS’ board of directors and Chief Executive Officer of PAS, spoke with Ms. Nooyi and agreed that the financial advisors of PAS and PepsiCo should meet to discuss process and related matters with respect to a possible transaction between PAS and PepsiCo.

 

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On June 1, 2009, representatives of Centerview Partners and BofA Merrill Lynch met with representatives of Goldman Sachs. At that meeting, Goldman Sachs indicated that PAS’ transactions committee was disappointed in the price offered by PepsiCo although it understood the strategic logic of the proposed combination. In particular, Goldman Sachs reiterated PAS’ belief that PepsiCo’s proposal to acquire PAS undervalued the strategic benefits of system consolidation, did not reflect the value of PAS’ strengths and stand-alone strategies, as evidenced by PAS’ strong first quarter results, and substantially undervalued the synergies that could be obtained in the proposed acquisition. In addition, representatives of Goldman Sachs expressed PAS’ transactions committee’s concern about the acquisition of PAS being conditioned on the closing of an acquisition of PBG. The Centerview Partners and BofA Merrill Lynch representatives then discussed the challenges PAS faced as a standalone company and explained why PepsiCo believed that its proposal to acquire PAS was a strong proposal. In particular, they noted that PepsiCo’s proposal represented a significant premium despite the increase in PAS’ stock price prior to the announcement, that PepsiCo’s proposal exceeded certain calculations of present value of PAS’ stock based on publicly available information and that PepsiCo’s stock, 50% of the proposed PAS merger consideration, was significantly undervalued based on the perspectives of various Wall Street research analysts.

On June 2, 2009, PBG issued a press release announcing an increase in its earnings guidance for the second quarter and fiscal year 2009. In connection with that earnings release PBG hosted a webcast presentation discussing its revised earnings guidance as well as its perspective on PepsiCo’s proposal. During such presentation PBG stated that it estimated the annual synergies of an acquisition by PepsiCo of both PBG and PAS to be in the range of $750 to $850 million. Later that day, PepsiCo issued a press release reiterating its view that synergies of at least $200 million would be achievable in the proposed acquisitions and stating that PBG had previously communicated to PepsiCo that a combination of PBG and PAS would generate synergies below $100 million.

On June 7, 2009 and again on June 8, 2009, Mr. Foss and Ms. Nooyi had telephone conversations regarding, among other things, PepsiCo’s proposal and the resulting interactions between PBG, PepsiCo and the PBG Board and Special Committee. At the conclusion of these conversations, Mr. Foss and Ms. Nooyi agreed that a meeting between PBG’s and PepsiCo’s respective financial advisors would be an appropriate next step.

On June 8, 2009 the PBG Special Committee held a telephonic meeting at which members of PBG management updated the PBG Special Committee on investor reactions to PBG’s second quarter earnings release and accompanying investor presentation. At such meeting, Mr. Foss briefed the PBG Special Committee on his June 7th conversation with Ms. Nooyi. The PBG Special Committee also discussed with Morgan Stanley and Cravath potential scenarios and next steps in respect of PepsiCo’s proposal.

On June 10, 2009, representatives of Centerview Partners and BofA Merrill Lynch met with representatives of Morgan Stanley, financial advisor to PBG. At that meeting, Morgan Stanley indicated that the PBG Special Committee believed that the price offered by PepsiCo grossly undervalued PBG and that PepsiCo was not giving appropriate value to various factors, including the synergies that could potentially be realized in connection with the transaction and the recent 2009 business improvements of PBG. In addition, representatives of Morgan Stanley expressed the PBG Special Committee’s concern about the acquisition of PBG being conditioned on the closing of an acquisition of PAS. The Centerview Partners and BofA Merrill Lynch representatives then discussed PepsiCo’s view of the challenges PBG faced as a standalone company and explained why PepsiCo believed that its proposal to acquire PBG was a strong proposal. In particular, they noted that PepsiCo’s proposal represented a significant premium despite the increase in PBG’s stock price prior to the announcement, that PepsiCo’s proposal exceeded certain calculations of present value of PBG’s stock based on publicly available information and that PepsiCo’s stock, 50% of the proposed PBG merger consideration, was significantly undervalued based on the perspectives of various Wall Street research analysts.

During the week following the June 10, 2009 meeting, representatives of Centerview Partners and BofA Merrill Lynch had a series of additional meetings and telephone calls with representatives of Morgan Stanley.

 

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The Morgan Stanley representatives continued to indicate that PBG believed that PepsiCo’s synergy estimates did not capture all synergies that could be expected from the combination of PepsiCo, PBG and PAS and that their preliminary financial analyses indicated that a reasonable per share value of PBG was significantly above the current proposal.

On June 11, 2009, representatives of Centerview Partners and BofA Merrill Lynch and representatives of Goldman Sachs met. At this meeting, the Goldman Sachs representatives informed representatives of Centerview Partners and BofA Merrill Lynch of the importance to PAS’ transactions committee of the absolute value of the consideration offered to PAS’ stockholders in any PepsiCo proposal, the relative pricing between any PAS transaction and PBG transaction and the absence in any PAS transaction of a closing condition requiring the closing of any transaction with PBG. Representatives from Goldman Sachs also stated that PAS believed that system consolidation had strategic merit and could drive significant value creation through, among other things, reduced supplier complexity, unlocking revenue growth and near-term cost synergies.

On June 12, 2009 the PBG Special Committee held a telephonic meeting at which Mr. Foss updated the PBG Special Committee on his June 8th conversation with Ms. Nooyi. Representatives from Morgan Stanley discussed with the PBG Special Committee their June 10th meeting with representatives of Centerview Partners and BofA Merrill Lynch. Morgan Stanley informed the PBG Special Committee that, in light of the questions that the advisors to PBG and PAS raised concerning PepsiCo’s synergy estimates, the respective financial advisors agreed that members of PepsiCo senior management should meet directly with members of senior management at each of PBG and PAS to discuss projected synergies of a combination of PepsiCo, PBG and PAS. PBG’s Special Committee unanimously directed PBG senior management to participate in such meetings.

Between June 17, 2009 and June 25, 2009, members of senior management of PepsiCo, together with representatives of its financial advisors, held several meetings with members of senior management of PBG and representatives of Morgan Stanley to discuss estimated synergies arising from a combination of PepsiCo, PBG and PAS. At a meeting between representatives of PepsiCo and PBG on June 17, 2009, members of senior management of PepsiCo discussed the challenges facing the liquid refreshment beverage business and the business risks and investments required to achieve significant synergies as a result of a PepsiCo, PBG and PAS combination. PBG’s senior management and the Morgan Stanley representatives indicated that PBG believed that annual pre-tax synergies from a combination of PepsiCo, PBG and PAS could be between $750 and $850 million, based on a one-time investment of approximately $800 million and representing a net present value in excess of $5 billion based on a ten year discounted cash flow with no terminal value. This calculation of potential synergies included, among other things, cost savings associated with manufacturing and supply chain optimization, route-to-market opportunities and elimination of redundancies in general and administrative functions. At a meeting on June 25, 2009, members of senior management of PepsiCo discussed where the parties differed as to their synergy estimates and explained PepsiCo’s synergy work to date. The PepsiCo representatives further agreed to review PepsiCo’s work on synergies in light of PBG’s view on potential synergies to determine whether there were any additional synergies that could be associated with the combination of PepsiCo, PBG and PAS.

On June 24, 2009, members of senior management of PepsiCo, together with representatives of its financial advisors, met with members of senior management of PAS and representatives of Goldman Sachs to discuss estimated synergies arising from a combination of PepsiCo, PBG and PAS. Prior to the meeting, PepsiCo and PAS entered into a confidentiality agreement. At the meeting, the members of senior management of PAS discussed PAS’ synergy estimates. The PepsiCo representatives agreed to review PepsiCo’s synergy work in light of PAS’ view on potential synergies to determine whether there were any additional synergies that could be associated with the combination of PepsiCo, PBG and PAS.

On June 25, 2009, the PBG Special Committee held a telephonic meeting at which Mr. Foss and representatives from Morgan Stanley briefed the committee members on their recent meetings with PepsiCo senior management and financial advisors. In addition, PBG management reviewed with the PBG Special

 

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Committee certain actions that could be taken, and strategies that could be pursued, by PBG in the absence of a transaction arising from PepsiCo’s proposal, including a potential buyback of PBG common stock and certain strategic acquisitions.

In the week following the meetings with PBG and PAS to discuss synergies, members of senior management of PepsiCo again reviewed its synergy estimates and concluded that the transactions could reasonably be expected to create approximately $300 million of annual pre-tax synergies by 2012 largely due to greater cost efficiency and improved revenue opportunities.

Between June 29, 2009 and July 1, 2009, representatives of Centerview Partners and BofA Merrill Lynch had several meetings and phone calls with representatives of Morgan Stanley. During the course of these meetings and calls, the Centerview Partners and BofA Merrill Lynch representatives indicated to the Morgan Stanley representatives that, in light of the revised estimate of $300 million of annual pre-tax synergies by 2012, together with the 2009 improvements in PBG’s business and the improvement in the markets generally, PepsiCo would consider a price of $34.50 per share of PBG stock.

During the period between June 29, 2009 and July 13, 2009, representatives of Centerview Partners and BofA Merrill Lynch had a series of meetings and calls with representatives of Goldman Sachs. The Centerview Partners and BofA Merrill Lynch representatives conveyed to the Goldman Sachs representatives that PepsiCo had revised its synergy estimates to approximately $300 million of annual pre-tax synergies by 2012. The Goldman Sachs representatives indicated that the PAS transactions committee believed that the price per share of PAS stock needed to be at a premium to the then current trading price. During this period, the closing trading price per share of PAS stock on the New York Stock Exchange ranged from $26.15 to $27.14. The Centerview Partners and BofA Merrill Lynch representatives indicated that PepsiCo would consider a price above that range but that it would not proceed with a transaction with PAS unless it reached an agreement with PBG.

On July 1, 2009, the PBG Special Committee held a telephonic meeting at which representatives of Morgan Stanley informed the PBG Special Committee of the revised terms that PepsiCo’s financial advisors stated PepsiCo would consider. Morgan Stanley also discussed with the PBG Special Committee its preliminary analysis of such revised terms from a financial point of view. Following extensive discussion, the PBG Special Committee authorized Morgan Stanley to reply to PepsiCo’s financial advisors in respect of the proposed $34.50 per share offer price (and other proposed revised terms) that while the PBG Special Committee had not come to a firm view on valuation, there was potential support among the PBG Special Committee members for a transaction at a price below $40 per share, but closer to $40 per share than $34.50 per share. The PBG Special Committee also authorized Morgan Stanley to reply that cash consideration would be preferred, that any transaction should reflect an appropriate valuation of PBG relative to PAS and that the PBG closing should not be conditioned on closing of an acquisition of PAS.

On July 2, 2009, representatives of Morgan Stanley informed PepsiCo’s financial advisors of the PBG Special Committee’s response to the proposed revised offer terms. In addition, Mr. Foss phoned Michael D. White, Chief Executive Officer of PepsiCo International and Vice Chairman of PepsiCo, to similarly inform him of the PBG Special Committee’s response.

Between July 3, 2009 and July 13, 2009, representatives of Centerview Partners and BofA Merrill Lynch had a series of meetings and phone calls with representatives of Morgan Stanley. During the course of these meetings, the Centerview Partners and BofA Merrill Lynch representatives indicated to Morgan Stanley that PepsiCo would consider no longer requiring that the closing of the acquisition of PBG be conditioned on the closing of an acquisition of PAS and that PepsiCo would consider increasing the portion of the merger consideration payable in cash if that were more attractive to the PBG Special Committee.

On July 14, 2009, Ms. Nooyi and Mr. White met with Mr. Hall and Mr. Foss. Following discussion regarding the challenges in the liquid refreshment beverage business, Ms. Nooyi proposed a price per share of

 

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PBG stock of $35.50, subject to due diligence and negotiation and completion of definitive documentation. Mr. Hall stated that he would discuss the proposal with the PBG Special Committee and report to Ms. Nooyi within 24 hours.

On July 15, 2009, the PBG Special Committee met to discuss PepsiCo’s revised $35.50 per share offer, and at that meeting Morgan Stanley provided the PBG Special Committee with its preliminary financial analysis of such offer. Mr. Hall also briefed the PBG Special Committee on the substance of the July 14th meeting among himself, Ms. Nooyi, Mr. White and Mr. Foss. Following discussion, the PBG Special Committee determined that it should reject PepsiCo’s revised $35.50 per share offer and deliver a response to PepsiCo indicating that there was potential support among the members of the PBG Special Committee for a transaction at a price per share of at least $37.75.

The following day, Mr. Hall and Mr. Foss met with Ms. Nooyi and Mr. White and delivered the PBG Special Committee’s response as described above. Ms. Nooyi responded that, in PepsiCo’s view, a price of $35.50 per share of PBG stock was a full and fair offer.

On July 17, 2009, at a regularly scheduled meeting of the board of directors of PepsiCo, senior management of PepsiCo, together with representatives of PepsiCo’s financial advisors and legal advisor, among other things, updated the PepsiCo directors on the status of the negotiations with PBG and PAS.

On July 20, 2009, the PBG Special Committee met to receive an update from Mr. Hall and Mr. Foss on their July 16th meeting with Ms. Nooyi and Mr. White, and to discuss potential scenarios and next steps in respect of PepsiCo’s proposal. The PBG Special Committee also discussed retaining an additional financial advisor in the event a transaction with PepsiCo were to proceed. Following discussion, a number of potential firms were identified and Mr. Hall was instructed to solicit proposals from such firms.

On the morning of July 31, 2009, Ms. Nooyi met again with Mr. Hall. At that meeting, each of Ms. Nooyi and Mr. Hall expressed concern that the disruption relating to the proposed transaction could harm the respective businesses of PBG and PepsiCo and that it would be in the interests of their respective stockholders to determine whether the parties could reach an agreement. After extensive discussion regarding the state of the business and valuation, Ms. Nooyi proposed a transaction at a price per share of $36.50, subject to due diligence and negotiation and completion of definitive documentation. Mr. Hall agreed to present such proposal to the PBG Special Committee.

Later on July 31, 2009, the PBG Special Committee met to receive Mr. Hall’s update of his meeting that morning with Ms. Nooyi and of PepsiCo’s revised $36.50 per share offer. Morgan Stanley discussed with the PBG Special Committee its preliminary financial analysis of the revised $36.50 per share offer and indicated that, subject to the terms of any proposed definitive agreement, Morgan Stanley anticipated that they would be able to render an affirmative opinion as to the fairness, from a financial point of view, of such revised consideration to be received by PBG’s stockholders (other than PepsiCo and its affiliates). Following discussion, the members of the PBG Special Committee indicated their general support for a transaction at $36.50 per share, consisting of 50% PepsiCo stock and 50% cash, which transaction would not be conditioned on the closing of a transaction with PAS. The PBG Special Committee authorized PBG’s management, Morgan Stanley and Cravath to engage in discussions and negotiations of potential definitive documentation with respect to PepsiCo’s revised proposal, the final terms of which would be subject to approval by the PBG Special Committee and the PBG Board. At the July 31, 2009 meeting, following discussion of several potential additional financial advisors, the PBG Special Committee approved the engagement of Perella Weinberg as financial advisor to the PBG Special Committee in respect of PepsiCo’s proposal.

Following the PBG Special Committee meeting, Mr. Hall contacted Ms. Nooyi and informed her that, assuming that the parties could reach agreement on the other terms of the transaction, the PBG Special Committee would, subject to due diligence and the negotiation and completion of definitive documentation,

 

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recommend that the PBG Board accept a transaction at a price per share of PBG stock of $36.50, consisting of 50% PepsiCo stock and 50% cash, that would not be conditioned on the closing of a transaction with PAS.

The same day, Ms. Nooyi met with Mr. Pohlad. Ms. Nooyi explained that PepsiCo had tentatively reached agreement on price with PBG and that it was willing to work towards a mutually agreeable transaction with PAS at a price per share of PAS stock of $27.00, consisting of 50% PepsiCo stock and 50% cash. Mr. Pohlad informed Ms. Nooyi that while he was not authorized to negotiate the terms of the transaction, including price, he expressed his view that the price offered was inadequate but that he would take the proposal back to PAS’ transactions committee.

That same day, representatives of Goldman Sachs, Centerview Partners and BofA Merrill Lynch discussed PepsiCo’s revised proposal of $27.00 per share of PAS common stock. Representatives of Goldman Sachs informed representatives of Centerview Partners and BofA Merrill Lynch that the revised proposal price would not be acceptable to PAS’ transactions committee and reminded them of the importance to PAS’ transactions committee, in addition to absolute value, of the relative pricing between any PAS transaction and PBG transaction. Representatives of Centerview Partners and BofA Merrill Lynch then informed representatives of Goldman Sachs that PepsiCo was willing to increase the price it was offering per share of PAS common stock to $28.00 but that the PAS transaction would be conditioned on consummation of the transaction with PBG.

That evening, representatives of Davis Polk contacted representatives of Cravath to inform them that Davis Polk expected to send them a draft merger agreement the following day. The Davis Polk representatives also called representatives of Briggs and Morgan and Sullivan & Cromwell to inform them that Davis Polk expected to send them a draft merger agreement the following day.

On August 1, 2009, PepsiCo entered into a supplement to its confidentiality agreement with PAS and, on August 2, 2009, PepsiCo entered into a confidentiality agreement with PBG. Thereafter, PepsiCo commenced its due diligence investigation of each of PBG and PAS and PBG and PAS commenced their respective due diligence investigations of PepsiCo. Management and financial advisors of the parties participated in due diligence sessions in New York and Minnesota.

During the course of a meeting of PAS’ transactions committee meeting on August 1, 2009, representatives from Goldman Sachs called representatives from Centerview Partners and BofA Merrill Lynch, and informed them that PAS’ transactions committee had determined that at $28.00 per share of PAS common stock, there was not sufficient pricing parity between the PAS transaction and PBG transaction based on the premium that would be paid to each party based on each party’s stock price immediately prior to the announcement of the PepsiCo proposals, despite that $28.00 per share of PAS common stock represented a higher relative EBITDA multiple than what was implied by PepsiCo’s offer to PBG, and it did not want the PAS transaction conditioned on consummation of the transaction with PBG. On July 31, 2009, the last trading day before the PAS transactions committee meeting, the closing price of PAS common stock was $26.78 per share and the closing price of PBG common stock was $33.95 per share. Subsequently, the representatives from Centerview Partners and BofA Merrill Lynch called the representatives from Goldman Sachs and informed them that PepsiCo was willing to increase the price it was offering per share of PAS common stock to $28.50 but that the PAS transaction would still be conditioned on consummation of the transaction with PBG.

On the same day, representatives of Davis Polk distributed a draft PBG merger agreement to Cravath and a draft PAS merger agreement to Briggs and Morgan and Sullivan & Cromwell.

Also on that day, representatives of PepsiCo and Davis Polk participated in a teleconference with representatives of Bank of America, N.A. and its legal counsel regarding a bridge facility to finance the acquisitions of PBG and PAS.

Late that evening, representatives of each of Davis Polk and Cravath held a teleconference to discuss the draft PBG merger agreement. The Cravath representatives identified certain areas of concern and indicated that they expected to distribute a revised draft PBG merger agreement the following day.

 

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On August 2, 2009, the parties, in consultation with their financial advisors, continued their due diligence investigations.

Also on August 2, 2009, Cravath sent a revised draft PBG merger agreement to Davis Polk. Throughout the day, representatives of Davis Polk discussed with Cravath representatives various issues with respect to the draft PBG merger agreement.

On the same day, PepsiCo and Davis Polk received a draft financing commitment letter from Bank of America, N.A.’s legal counsel. The facility proposed was a 364-day unsecured revolving bridge facility to finance the acquisitions of PBG and PAS. On August 2, 2009 and August 3, 2009, representatives of Davis Polk negotiated and finalized the commitment letter.

In the afternoon of August 2, 2009, representatives of Sullivan & Cromwell contacted representatives of Davis Polk to convey certain of PAS’ issues on the draft PAS merger agreement. Late that night, Briggs and Morgan sent a revised draft PAS merger agreement to Davis Polk.

In the early hours of August 3, 2009, Davis Polk sent a revised draft PBG merger agreement to Cravath and a revised draft PAS merger agreement to Briggs and Morgan and Sullivan & Cromwell. In addition, Davis Polk sent the then current draft of the PAS merger agreement to PBG and the then current draft of the PBG merger agreement to PAS. Davis Polk also sent the then current drafts of the merger agreements, together with a summary of the drafts and other materials, to the board of directors of PepsiCo in preparation for a special meeting of the board scheduled for the late afternoon of August 3, 2009.

Also during the afternoon of August 3, 2009, PepsiCo separately agreed with each of PBG and PAS that stockholders of each company would receive as the form of merger consideration shares of PepsiCo common stock with the right of the applicable stockholders (other than PepsiCo and its subsidiaries (including Metro)) to elect to receive cash instead of PepsiCo common stock, subject to proration such that the aggregate consideration to be paid to such stockholders would consist of 50% PepsiCo common stock and 50% cash. See “The Merger Agreement—Election Procedure” beginning on page [—] of this proxy statement/prospectus.

Throughout August 3, 2009, representatives of Davis Polk conferred with representatives of Cravath on various issues on the draft PBG merger agreement and with representatives of Briggs and Morgan and Sullivan & Cromwell on various issues on the draft PAS merger agreement. In addition, drafts of each party’s disclosure schedules to the PBG merger agreement were circulated to the other party and drafts of each party’s disclosure schedules to the PAS merger agreement were circulated to the other party.

Late in the afternoon of August 3, 2009, PBG’s Special Committee and Board met. Certain directors participated via teleconference. Representatives from Morgan Stanley, Perella Weinberg and Cravath attended the meetings, and copies of presentation materials from each of Morgan Stanley, Perella Weinberg and Cravath, as well as a draft of the merger agreement, were distributed to the members of the PBG Board in advance of the meetings. The PBG Special Committee met first. Directors Quelch and Alvarado attended the PBG Special Committee at the request of its Chairman, Mr. Hall. At this meeting, each of Perella Weinberg and Morgan Stanley delivered its financial analysis in connection with the proposed transaction and its oral opinion, subsequently confirmed in writing, that, as of the date of the opinion and based upon and subject to the assumptions, qualifications and limitations set forth therein, the merger consideration to be received by unaffiliated stockholders of PBG was fair from a financial point of view to such stockholders. See “—Opinions of PBG’s Financial Advisors” beginning on page [—] of this proxy statement/prospectus. The PBG Special Committee raised questions regarding various aspects of Morgan Stanley’s and Perella Weinberg’s analyses, including the methodologies used and underlying assumptions, to which each of Morgan Stanley and Perella Weinberg responded. Members of PBG senior management reported to the PBG Special Committee their view of the proposed transaction and the results of their due diligence inquiries with respect to PepsiCo. Representatives from Cravath then reviewed with the PBG Special Committee the draft merger agreement and certain key terms

 

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thereof. The remaining issues on the merger agreement were identified to the PBG Special Committee and the PBG Special Committee’s position on such issues was indicated to Cravath. The PBG Special Committee also considered and discussed the specific factors described in “Recommendation of the PBG Special Committee and the PBG Board as to the Fairness of the Merger—The Special Committee” beginning on page [—] of this proxy statement/prospectus. The PBG Special Committee then unanimously determined that it should recommend to the PBG Board that the PBG Board:

 

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accept PepsiCo’s revised proposal, which, among other things, increased the price per share offered for each share of PBG common stock to $36.50 and clarified that consummation of the transaction with PBG was not conditioned on the consummation of a transaction with PAS, as being advisable and in the best interests of PBG and its stockholders and substantively and procedurally fair to the unaffiliated security holders of PBG;

 

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adopt a resolution approving the merger agreement and declaring its advisability and determining that the proposed transaction is substantively and procedurally fair to the unaffiliated security holders of PBG; and

 

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amend PBG’s stockholder rights plan to render the rights thereunder inapplicable to the transactions contemplated by the merger agreement.

In accordance with PBG’s Bylaws, the PBG Audit and Affiliated Transactions Committee then met to consider PepsiCo’s proposal. Following brief discussion, the PBG Audit and Affiliated Transactions Committee approved the proposed transactions.

Following the meeting of the PBG Audit and Affiliated Transactions Committee, the PBG Board met. Directors Compton and Trudell received notice of the meeting and declined to participate. The PBG Special Committee reported to the PBG Board its recommendation as described above, and each of Morgan Stanley and Perella Weinberg confirmed to the PBG Board their respective financial analyses and opinions regarding the fairness of the proposed transaction to the unaffiliated stockholders of PBG, in each case as described above. The PBG Board, adopting the analysis of the PBG Special Committee:

 

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determined that the proposed transaction was advisable and in the best interests of PBG and its stockholders and substantively and procedurally fair to the unaffiliated security holders of PBG;

 

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adopted a resolution approving the merger agreement and declaring its advisability and determining that the proposed transaction is substantively and procedurally fair to the unaffiliated security holders of PBG;

 

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amended PBG’s stockholder rights plan to render the rights thereunder inapplicable to the transactions contemplated by the merger agreement; and

 

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authorized PBG’s management to execute and deliver the merger agreement and all other necessary documentation in connection with the transaction.

Following the PBG Special Committee meeting and PBG Board meeting, representatives of Cravath contacted representatives of Davis Polk to address the remaining issues in the PBG merger agreement. In addition, PepsiCo and PBG agreed to a termination fee equal to approximately 2.0% of the equity value of the merger. See “The Merger Agreement—Termination of the Merger Agreement” and “The Merger Agreement—Termination Fees Payable By PBG” each beginning on page [—] of this proxy statement/prospectus, and “The Merger Agreement—No Solicitation by PBG” beginning on page [—] of this proxy statement/prospectus.

Following a PAS transactions committee meeting, representatives of Davis Polk and Briggs and Morgan and Sullivan & Cromwell addressed the remaining issues in the PAS merger agreement. In addition, PepsiCo and PAS agreed to a termination fee equal to approximately 2.0% of the equity value of the PAS merger. Revised versions of the draft PAS merger agreement reflecting the parties’ agreements were distributed to the parties, as well as to PBG. Also during this period, the parties finalized the parties’ disclosure schedules to the PAS merger agreement.

 

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After the closing of the trading market in New York on August 3, 2009, the board of directors of PepsiCo held a special telephonic meeting, at which PepsiCo’s management and representatives of Centerview Partners, BofA Merrill Lynch and Davis Polk participated, to consider the potential transactions with PBG and PAS. Representatives of Centerview Partners provided an update on the background and process of the transactions. PepsiCo’s senior management reviewed and discussed various financial aspects of the transactions, including estimated synergies, PepsiCo’s due diligence investigation of PBG and PAS and the plan for financing the transactions. Also at this meeting, Centerview Partners and BofA Merrill Lynch reviewed with PepsiCo’s board of directors its financial analysis of the merger consideration and the PAS merger consideration, and each of Centerview Partners and BofA Merrill Lynch delivered to PepsiCo’s board of directors its respective oral opinion, each of which was confirmed by each of Centerview Partners and BofA Merrill Lynch by delivery of a written opinion dated August 3, 2009, to the effect that, as of that date and based on and subject to various assumptions and limitations described in its opinion, the merger consideration to be paid in the merger by PepsiCo to the Company’s stockholders other than PepsiCo and its subsidiaries was fair, from a financial point of view, to PepsiCo. See “—Opinion of PepsiCo’s Financial Advisors” beginning on page [—] of this proxy statement/prospectus. A representative of Davis Polk then reviewed the terms of the transactions and other matters related to their consideration of the transactions contemplated by the merger agreements. Following discussion, PepsiCo’s board of directors voted to approve the merger agreements and the transactions contemplated by the merger agreements, including the mergers, and the assumption of additional indebtedness in connection with the mergers, and authorized PepsiCo’s management to finalize and execute the merger agreements.

As of August 3, the financing commitment letter was executed by Bank of America, N.A., Citigroup Global Markets Inc. and certain of their affiliates and accepted by PepsiCo. See “—Financing of the Merger” beginning on page [—] of this proxy statement/prospectus.

On the morning of August 4, 2009, PepsiCo, PBG and PAS issued a joint press release announcing the execution of the merger agreements. See “The Merger Agreement” beginning on page [—] of this proxy statement/prospectus.

On August 5, 2009, PepsiCo voluntarily dismissed with prejudice PepsiCo’s complaint against PBG and certain members of its board of directors.

Recommendation of the PBG Special Committee and the PBG Board as to Fairness of the Merger

The PBG Special Committee

The PBG Board established a special committee consisting solely of independent directors to negotiate the terms of the merger on behalf of its unaffiliated stockholders with the assistance of independent legal and financial advisors. The PBG Special Committee, acting with the advice and assistance of independent legal and financial advisors, evaluated and negotiated the going private transaction, including the terms and conditions of the merger agreement, with PepsiCo. The PBG Special Committee unanimously resolved to recommend to the PBG Board that the board adopt a resolution approving the merger agreement and declaring that the merger agreement is advisable, substantively and procedurally fair to and in the best interests of PBG and the unaffiliated security holders of PBG.

In the course of reaching its determination and making the recommendation described above, the PBG Special Committee considered a number of factors, including the following:

 

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the PBG Special Committee’s understanding of PBG and its business as well as its financial performance, results of operations and future prospects, which understanding contributed to the PBG Special Committee’s determination as to fairness because it supported the PBG Special Committee’s view that the merger consideration reflected, among other things, an appropriate valuation of PBG as a stand-alone business;

 

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the PBG Special Committee’s understanding of, on the one hand, promising trends in the liquid refreshment beverage industry, including improving sales trends for carbonated soft drinks, continued commodity cost deflation, decreased volatility in foreign exchange rates, accelerating bottler consolidation and improvement in the industry correlated to overall economic trends, and, on the other hand, certain challenges facing the industry, including the increasing volatility of customer preferences for beverages, the increasing power and influence of certain retail customers, potential new tax and other legislation impacting the industry and the proliferation and diversification of new, competitive beverage products, which understanding contributed to the PBG Special Committee’s determination as to fairness because it supported the PBG Special Committee’s view that, although PBG’s growth prospects remained strong, it faced external challenges in maintaining and growing earnings and accordingly the value certainty of a going-private transaction would be beneficial to PBG’s unaffiliated security holders at this time;

 

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the fact that the merger consideration, calculated with reference to the closing stock price of PepsiCo common stock of $56.75 at July 31, 2009, is at a 44.8% premium per share of PBG common stock to the last closing price of PBG common stock prior to the public announcement of PepsiCo’s proposal on April 19, 2009 to acquire the outstanding shares of PBG’s common stock that it did not already own at a value of $29.50, which contributed to the PBG Special Committee’s determination as to fairness because it supported the PBG Special Committee’s view that PBG’s unaffiliated security holders would receive an appropriate premium for their shares in the going-private transaction (as compared to PBG’s unaffected stock price);

 

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the fact that the merger consideration, calculated with reference to the closing stock price of PepsiCo of $56.75 at July 31, 2009 represented an approximately 23.7% increase over the $29.50 value of PepsiCo’s April 19, 2009 proposal per share of PBG common stock, which contributed to the PBG Special Committee’s determination as to fairness because it supported the PBG Special Committee’s view that the merger negotiations had resulted in increased value for PBG’s unaffiliated security holders;

 

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the PBG Special Committee’s view, based on a range of synergy estimates developed by management and a leading global consulting firm, of the potential synergies available in connection with the merger and the PAS merger, which contributed to the PBG Special Committee’s determination as to fairness because it supported the PBG Special Committee’s view that the merger consideration payable to stockholders of PBG included an appropriate share of the total synergies value resulting from the merger and the PAS merger;

 

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the opinions delivered orally (subsequently confirmed in writing) by each of Morgan Stanley and Perella Weinberg, each dated August 3, 2009, to the effect that, as of that date and based on and subject to the assumptions, limitations and qualifications set forth in their respective opinions, the consideration to be received by PBG’s unaffiliated stockholders pursuant to the merger agreement was fair, from a financial point of view, to such stockholders, which contributed to the PBG Special Committee’s determination as to fairness because it supported the PBG Special Committee’s view that the price offered by PepsiCo was fair to PBG’s unaffiliated security holders;

 

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the long-term value of PBG common stock, which contributed to the PBG Special Committee’s determination as to fairness because it supported the PBG Special Committee’s view that the price offered by PepsiCo was fair in light of, among other things, such long-term value;

 

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the merger agreement’s inclusion of provisions allowing the PBG Board to consider unsolicited acquisition proposals, which contributed to the PBG Special Committee’s determination as to fairness because it allowed the PBG Board to evaluate potentially superior third party proposals after the date on which the merger agreement was signed;

 

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the cash-election feature of the merger agreement, which contributed to the PBG Special Committee’s determination as to fairness because it allows PBG’s stockholders to choose (subject to proration)

 

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whether to participate financially in the potential risks and benefits associated with PepsiCo’s common stock and its ability to execute on its business plans;

 

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the terms and conditions of the merger agreement, described under “The Merger Agreement” beginning on page [—] of this proxy statement/prospectus, which contains conditions to completion of the merger that the PBG Special Committee, after consulting with its legal counsel, considered to be reasonable, customary and reasonably likely to be satisfied in a timely manner, which the PBG Special Committee believed supported its determination;

 

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the fact that there is no financing contingency to the merger, which contributed to the PBG Special Committee’s determination as to fairness because it increased the certainty of the value offered to PBG’s unaffiliated security holders;

 

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the fact that the merger was not conditioned upon the completion of the PAS merger, as was the case with PepsiCo’s April 19, 2009 proposal, which contributed to the PBG Special Committee’s determination as to fairness because it increased the certainty of the value offered to PBG’s unaffiliated security holders; and

 

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the likelihood, considering the terms of the merger agreement, PepsiCo’s financial and capital resources and PepsiCo’s incentives to complete the merger, that the merger would be completed, and completed in a reasonably prompt time frame, which contributed to the PBG Special Committee’s determination as to fairness because it supported the PBG Special Committee’s view that it increased the certainty of value and time value of the consideration offered to PBG’s unaffiliated security holders.

The PBG Special Committee also considered a variety of risks and other potentially negative factors concerning the merger agreement and the transactions contemplated thereby, including the merger. These factors included:

 

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the merger agreement’s stipulation that no more than an aggregate of 50% of the shares of PBG common stock held by PBG’s unaffiliated stockholders will be converted into the right to receive PepsiCo common stock and no more than an aggregate of 50% of the shares of PBG common stock held by PBG’s unaffiliated stockholders will be converted into the right to receive cash, and that the receipt of cash consideration may result in tax liability for certain PBG stockholders, which contributed to the PBG Special Committee’s determination as to fairness because any individual PBG stockholder might not receive the aggregate consideration he or she elects and may be subject to tax liability;

 

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the fact that PBG’s stockholders electing to receive PepsiCo common stock would constitute a relatively small percentage of equity ownership of PepsiCo, which contributed to the PBG Special Committee’s determination as to fairness because such stockholders may not meaningfully participate in future synergies resulting from the merger;

 

•

PepsiCo’s commitment to vote or cause to be voted approximately 39.2% of the combined voting power of PBG common stock and PBG Class B common stock in favor of the merger, combined with the absence of a requirement that a majority of PBG’s unaffiliated stockholders approve the merger agreement, which contributed to the PBG Special Committee’s determination as to fairness because it increased the likelihood that the merger would be approved even if a significant number of PBG’s unaffiliated security holders voted against it;

 

•

the potential for disruptions to PBG’s operations following the announcement of the merger, including potentially the loss of key employees as a result of the uncertainty over possible changes to PBG, which contributed to the PBG Special Committee’s determination as to fairness because it increased the risk that PBG would be able to continue to execute on its current business plans in the event the merger were not consummated;

 

•

the fact that, while PBG expects the merger to be consummated, there can be no assurance that all conditions to the parties’ obligations to complete the merger agreement, including any necessary

 

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regulatory consents and approvals, will be satisfied such that the merger will be consummated, which contributed to the PBG Special Committee’s determination as to fairness because it informed the PBG Special Committee’s view as to the certainty of the value offered to PBG’s unaffiliated security holders;

 

•

the merger agreement’s covenants restricting the conduct of PBG’s business, including, among other things, prohibitions on PBG’s entry into certain new material contracts and new material lines of business as well as the issuance of new PBG securities, which contributed to the PBG Special Committee’s determination as to fairness because it required PBG to comply with such covenants (and consequently had the potential to affect PBG’s stand-alone performance) until the merger is consummated or abandoned; and

 

•

limitations on PBG’s ability to obtain alternative offers from third parties to acquire PBG as a result of PBG’s existing relationship with PepsiCo, including its ownership position in PBG, certain restrictions in its material commercial agreements with PBG, the termination fee payable by PBG, the fact that PepsiCo has a “last look” right with respect to superior proposals received by PBG, and PepsiCo’s public statement that it would not support any such alternative transaction, which contributed to the PBG Special Committee’s determination as to fairness because it caused the PBG Special Committee to conclude that it was unlikely, although possible, that an alternative transaction would be proposed by a third party.

This discussion of the information and factors considered by the PBG Special Committee in reaching its conclusions and recommendation includes all of the material factors considered by the PBG Special Committee, but is not intended to be exhaustive. In view of the wide variety of factors the PBG Special Committee considered in evaluating the merger agreement and the transactions contemplated thereby, including the merger, and the complexity of these matters, the PBG Special Committee did not find it practicable, and did not attempt, to quantify, rank or otherwise assign relative weight to the factors. In addition, different members of the PBG Special Committee may have given different weight to different factors.

In reaching its determination and making its recommendation, the PBG Special Committee did not consider the liquidation value of PBG to be a relevant valuation method because it considered PBG to be a viable going concern. The PBG Special Committee did not consider net book value to be a useful indicator of PBG’s value because the PBG Special Committee believed that net book value is indicative of historical costs but is not a material indicator of the value of PBG as a going concern. In addition, the PBG Special Committee did not consider firm offers made by unaffiliated persons during the last two years, as no such offers were made during that time.

The PBG Special Committee believes that sufficient procedural safeguards were and are present to ensure the fairness of the merger and to permit the PBG Special Committee to represent effectively the interests of PBG’s unaffiliated stockholders. These procedural safeguards include the following:

 

•

the PBG Special Committee’s active negotiations, with the assistance of independent legal and financial advisors, with representatives of PepsiCo regarding the merger consideration and the other terms of the merger and the merger agreement, which contributed to the PBG Special Committee’s determination as to fairness because the PBG Special Committee believed such active negotiations resulted in the transaction’s terms being more beneficial to PBG’s unaffiliated stockholders than those originally proposed by PepsiCo;

 

•

the merger agreement’s requirement that (as provided in PBG’s Bylaws) the merger be approved by a majority of the votes cast by holders of outstanding shares of PBG common stock entitled to vote, voting separately as a class (in addition to approval by a majority of the outstanding voting power of the shares of PBG common stock and PBG Class B common stock entitled to vote, voting as a single class), which contributed to the PBG Special Committee’s determination as to fairness because the required class vote of PBG common stock (of which PepsiCo owns approximately 32%) provides for a

 

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vote on the merger in addition to the required vote of all outstanding shares of PBG common stock and PBG Class B common stock voting as a single class (of which PepsiCo owns approximately 39.2% of the voting power);

 

•

the fact that the PBG Special Committee is comprised of five independent directors who are not affiliated with PepsiCo and are not employees of PBG or any of its subsidiaries, which contributed to the PBG Special Committee’s determination as to fairness because it believed such individuals could objectively evaluate the proposed transaction;

 

•

the fact that, other than their receipt of board and special committee fees (which are not contingent upon the consummation of the merger or the PBG Special Committee’s recommendation of the merger), their indemnification and liability insurance rights under the merger agreement and their entitlement under the merger agreement to receive merger consideration in respect of their shares of PBG common stock and cash in respect of phantom stock units and restricted stock units, members of the PBG Special Committee do not have an interest in the merger different from that of PBG’s unaffiliated stockholders, which contributed to the PBG Special Committee’s determination as to fairness because it believed the compensation structure for the PBG Special Committee, as well as the absence of differing interests in the merger, did not interfere with the ability of the PBG Special Committee to objectively evaluate the transaction;

 

•

the fact that the PBG Special Committee received the advice and assistance of Morgan Stanley and Perella Weinberg, as financial advisors, and Cravath, as legal advisor, and requested and received from each of Morgan Stanley and Perella Weinberg an opinion, delivered orally and confirmed in writing on August 3, 2009, with respect to the fairness, from a financial point of view, of the merger consideration to be received by PBG’s unaffiliated stockholders pursuant to the merger agreement, which the PBG Special Committee believed supported its conclusion that the price offered by PepsiCo was fair to PBG’s unaffiliated security holders;

 

•

the recognition by the PBG Special Committee that it had no obligation to recommend the approval of the merger or any other transaction, which contributed to the PBG Special Committee’s determination as to fairness because it believed that such recognition allowed the PBG Special Committee to objectively evaluate the transaction;

 

•

the recognition by the PBG Special Committee that, under the terms of the merger agreement, each of the PBG Special Committee and the PBG Board could consider and recommend superior proposals, which contributed to the PBG Special Committee’s determination as to fairness because it supported the PBG Special Committee’s view that the price offered by PepsiCo, a motivated buyer, would need to be high enough to mitigate the risk to PepsiCo that an alternative proposal could occur and be approved; and

 

•

the recognition by the PBG Special Committee that, under the terms of the merger agreement, it could recommend that the PBG Board, and the PBG Board could, withdraw, modify or qualify the recommendation of the merger and the merger agreement if the failure to so withdraw, modify or qualify would be inconsistent with the PBG Board’s fiduciary duties under Delaware law, which contributed to the PBG Special Committee’s determination as to fairness because it supported the PBG Special Committee’s view that the PBG Board would be able to communicate to PBG’s unaffiliated security holders its view regarding a transaction, and change such recommendation, in order that such security holders would be fully informed in making a voting decision with respect to the transaction.

In light of the procedural safeguards described above, the PBG Special Committee did not consider it necessary to retain an unaffiliated representative to act solely on behalf of PBG’s unaffiliated stockholders for purposes of negotiating the terms of the merger agreement or preparing a report concerning the fairness of the merger agreement and the merger.

 

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The PBG Board

In reaching its determination that the merger agreement and the merger are substantively and procedurally fair and are advisable and in the best interests of the unaffiliated security holders of PBG, the PBG Board determined that the analysis of the PBG Special Committee that the merger consideration was substantively and procedurally fair to PBG’s unaffiliated stockholders was reasonable and expressly adopted the conclusions and analyses of the PBG Special Committee. In determining the fairness of the transaction, the PBG Board considered and relied upon:

 

•

the PBG Special Committee’s process in considering the merger, which contributed to the PBG Board’s determination as to fairness because it supported the PBG Board’s view that the terms of the transaction recommended by the PBG Special Committee were a result of a procedurally fair process and an active negotiation between the PBG Special Committee and PepsiCo;

 

•

the PBG Board and PBG Special Committee having received advice from Morgan Stanley, Perella Weinberg and Cravath, which contributed to the PBG Board’s determination as to fairness because it supported the PBG Board’s view that the price offered by PepsiCo was fair to PBG’s unaffiliated security holders;

 

•

the PBG Special Committee’s August 3, 2009 recommendation, expressly adopted by the PBG Board, that the PBG Board determine that the merger agreement and the merger are advisable, substantively and procedurally fair to and in the best interests of PBG and the unaffiliated security holders of PBG and recommend that PBG’s stockholders adopt the merger agreement and approve the transactions contemplated by the merger agreement, including the merger, which contributed to the PBG Board’s determination as to fairness because the PBG Board had resolved not to approve or recommend a transaction in respect of the PepsiCo proposal without the affirmative recommendation of the PBG Special Committee;

 

•

the long-term value of PBG common stock, which contributed to the PBG Board’s determination as to fairness because it supported the PBG Board’s view that the price offered by PepsiCo was fair in light of, among other things, such long-term value; and

 

•

the factors referred to above as having been taken into account by the PBG Special Committee, including the amount of the merger consideration in general and in comparison to the last unaffected stock price and the original price proposed by PepsiCo, the terms of the merger agreement and the receipt by the PBG Board of the opinions of Morgan Stanley and Perella Weinberg, each dated August 3, 2009, to the effect that, as of the date and based upon and subject to the assumptions, limitations and qualifications set forth in their respective opinions, the merger consideration to be received by PBG’s unaffiliated stockholders pursuant to the merger agreement was fair, from a financial point of view, to such stockholders.

The PBG Board also believes that sufficient procedural safeguards were present to ensure the fairness of the transaction and to permit the PBG Special Committee to represent effectively the interests of the unaffiliated security holders of PBG. The PBG Board reached this conclusion based on, among other things:

 

•

the fact that the PBG Special Committee consisted solely of independent directors who are not affiliated with PepsiCo and its affiliates, which contributed to the PBG Board’s determination as to fairness because the PBG Board believed these directors could objectively evaluate PepsiCo’s proposal; and

 

•

the fact that the negotiations that had taken place between representatives of PepsiCo, on the one hand, and the PBG Special Committee and its representatives, on the other hand, were structured and conducted so as to preserve the independence of the PBG Special Committee, which contributed to the PBG Board’s determination as to fairness because it supported the PBG Board’s view that the transaction was procedurally fair to PBG’s unaffiliated security holders.

 

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The PBG Board also considered a variety of risks and other potentially negative factors concerning the merger agreement and the transactions contemplated thereby, including the merger. These factors included:

 

•

the fact that PBG’s stockholders electing to receive PepsiCo common stock will constitute a relatively small percentage of equity ownership of PepsiCo, which contributed to the PBG Board’s determination as to fairness because such stockholders may not meaningfully participate in future synergies resulting from the merger;

 

•

the fact that, due to PepsiCo’s ownership position in PBG, certain restrictions in its material commercial agreements with PBG and its public statement that it would not support an alternative transaction, the PBG Board believed there was no reason to contact, and did not contact, third parties about a sale of PBG, which contributed to the PBG Board’s determination as to fairness because it caused the PBG Board to conclude that it was unlikely, although possible, that an alternative transaction would be proposed by a third party;

 

•

the fact that the merger agreement does not include as a requirement that the merger be approved by a majority of PBG’s unaffiliated stockholders, which contributed to the PBG Board’s determination as to fairness because it increased the likelihood that the merger would be approved even if a significant number of PBG’s unaffiliated security holders voted against it; and

 

•

the factors referred to above as having been taken into account by the PBG Special Committee, including the merger agreement’s stipulation that no more than an aggregate of 50% of the shares of PBG common stock held by PBG’s unaffiliated stockholders will be converted into the right to receive PepsiCo common stock and no more than an aggregate of 50% of the shares of PBG common stock not held by PBG’s unaffiliated stockholders will be converted into the right to receive cash, the fact that PBG’s stockholders electing to receive PepsiCo common stock may not meaningfully participate in future synergies resulting from the merger, the potential for disruptions to PBG’s operations following the announcement of the merger, the fact that there can be no assurances that all conditions to the parties’ obligations to complete the merger agreement will be satisfied such that the merger will be consummated, the merger agreement’s covenants restricting the conduct of PBG’s business and limitations on PBG’s ability to obtain alternative offers from third parties to acquire PBG.

In light of the procedural protections described above, the PBG Board did not consider it necessary to retain an unaffiliated representative (other than the PBG Special Committee and its legal and financial advisors) to act solely on behalf of PBG’s unaffiliated stockholders for purposes of negotiating the terms of the merger agreement or preparing a report concerning the fairness of the merger agreement and the merger.

In view of the wide variety of factors considered by the PBG Board in evaluating the merger and the complexity of these matters, the directors did not find it practicable, and did not attempt, to quantify, rank or otherwise assign relative weight to those factors. In addition, different members of the PBG Board may have given different weight to different factors. To avoid any actual conflict of interest or the appearance of any conflict of interest, directors John C. Compton and Cynthia M. Trudell, both of whom are executive officers of PepsiCo, did not participate in any board deliberations relating to the merger agreement and the merger and abstained from voting on the approval of the merger agreement.

In reaching its determination as to the fairness of the transaction, the PBG board (and the PBG Special Committee) did not consider the price paid by PBG in previous purchases of PBG common stock in the prior two years, as more fully described on page [—] of this proxy statement/prospectus, except to the extent it considered historical market prices generally. All such purchases were at-the-market purchases pursuant to ongoing share buyback programs, and were thus reflected in the PBG Board’s and the PBG Special Committee’s consideration of the historical trading prices of PBG common stock discussed above.

In reaching its determination and making its recommendation, the PBG Board did not consider the liquidation value of PBG to be a relevant valuation method because it considered PBG to be a viable going concern. Furthermore, the PBG Board did not consider net book value to be a useful indicator of PBG’s value

 

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because the PBG Board believed that net book value is primarily indicative of historical costs but is not a material indicator of the value of PBG as a going concern. The merger consideration, which as of August 3, 2009 had an equivalent price per share (based on 50%-50% cash-stock split of the merger consideration) of $36.32 per share, is approximately 350% greater that PBG’s net book value per share of $7.95 on a non-fully diluted basis as of June 13, 2009. In addition, the PBG Board did not consider firm offers made by unaffiliated persons during the last two years, as no such offers were made during that time.

In connection with the consummation of the merger, certain of PBG’s directors may receive benefits and compensation that may differ from the merger consideration you would receive. See “Interests of Certain Persons in the Merger” beginning on page [—] of this proxy statement/prospectus.

Based in part on the recommendation of the PBG Special Committee, the PBG Board, by the unanimous vote of the unaffiliated directors, recommends that PBG’s stockholders vote FOR approval of the proposal to adopt the merger agreement. This recommendation was made after consideration of all the material factors, both positive and negative, as described above.

PepsiCo’s Reasons for, and Purpose of, the Merger

The purpose of the merger is for PepsiCo to acquire the equity interest in PBG that it or its subsidiaries do not already own. In PepsiCo’s view, the merger would combine PBG’s bottling business with PepsiCo’s franchise company and create a more fully-integrated supply chain and go-to-market business model, improving the effectiveness and efficiency of the distribution of the PepsiCo brands distributed by PBG and enhancing accelerated revenue growth of PepsiCo following completion of the merger. PepsiCo believes that the merger would create a leaner, more agile business model, provide a stronger foundation for the future growth of PepsiCo and allow PepsiCo to realize operational benefits and cost synergies primarily in North America including, among others, an ability to bring product and package innovation to market more quickly, more streamlined manufacturing and distribution systems, elimination of redundant general and administrative costs and public company costs, greater flexibility in how PepsiCo goes to market, by product and channel, improved national account coordination and a greater ability to react quickly to technological advances and to changes in the marketplace.

PepsiCo views the merger as an important one in light of the evolving changes in the operating environment of the industry largely in North America, including the emergence of new competitors and the development of non-carbonated drinks, which have different economics and different distribution systems than carbonated soft drinks. Upon completion of the merger and the related integration processes, PepsiCo would handle distribution of approximately 70% of its total North American beverage volume, including both its direct-store-delivery bottling system and other liquid refreshment beverage warehouse systems. Upon completion of the merger and the PAS merger and the related integration processes, PepsiCo would handle distribution of approximately 80% of its total North American beverage volume, including both its direct-store-delivery bottling system and other liquid refreshment beverage warehouse systems.

PepsiCo believes that it could realize significant synergies relating to reduction of redundant costs, achieving scale efficiencies and realizing new revenue opportunities as a result of the acquisition.

Position of PepsiCo and Metro Regarding Fairness of the Merger

The rules of the SEC require PepsiCo and Metro to express their belief as to the fairness of the merger to the unaffiliated stockholders of PBG. PepsiCo and Metro believe that the merger is both procedurally and substantively fair to such stockholders. PepsiCo and Metro base this belief on the following factors, each of which, in their judgment, supports their view as to the fairness of the merger:

 

•

as the merger consideration, PepsiCo will pay cash for 50% of the outstanding shares of PBG common stock not held by PepsiCo or any of its subsidiaries, and with respect to which appraisal rights have not

 

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been properly exercised and perfected under Delaware law, and issue 0.6432 shares of PepsiCo common stock (which had a value of $36.50 based on the PepsiCo common stock closing price of $56.75 on July 31, 2009) for each of the remaining 50% of the outstanding shares of PBG common stock not held by PepsiCo or any of its subsidiaries, and with respect to which appraisal rights have not been properly exercised and perfected under Delaware law, to provide for an aggregate 50% cash/50% stock allocation. PepsiCo and Metro believe that this is relevant to the following factors supporting their view as to the fairness of the merger:

 

•

the aggregate value of the merger consideration of $36.50 per share, as described above, represents a premium of:

 

•

44.8% to the closing price of the shares of PBG common stock on April 17, 2009, the last trading day prior to the date of the announcement of PepsiCo’s proposal of April 19, 2009 to acquire the outstanding shares of PBG that it did not already own for $14.75 in cash and 0.283 shares of PepsiCo common stock per share of PBG common stock;

 

•

68.3% to the 30-day average closing prices of the shares of PBG common stock for the 30-day period prior to the date of the announcement of the April 19 proposal;

 

•

48.4% to the closing price of the shares of PBG common stock on April 13, 2009, the last trading day one week prior to the date of the announcement of the April 19 proposal;

 

•

86.3% to the closing price of the shares of PBG common stock on March 20, 2009, the last trading day one month prior to the date of the announcement of the April 19 proposal;

 

•

8.6% to the closing price of the shares of PBG common stock on August 3, 2009, the last trading day prior to the date of the announcement of the merger, on August 4, 2009;

 

•

9.1% to the 30-day average closing prices of the shares of PBG common stock for the 30-day period prior to the date of the announcement of the merger, on August 4, 2009;

 

•

7.8% to the closing price of the shares of PBG common stock on July 28, 2009, the last trading day one week prior to the date of the announcement of the merger, on August 4, 2009; and

 

•

7.1% to the closing price of the shares of PBG common stock on July 6, 2009, the last trading day one month prior to the date of the announcement of the merger, on August 4, 2009.

PepsiCo believes that these premiums support its view as to the fairness of the merger agreement and the merger because the implied value of the consideration payable in the merger represents what PepsiCo believes to be attractive premiums to the prices at which the PBG stock traded during the various periods or at the various dates described above, which include periods and dates not only prior to the public announcement of PepsiCo’s initial proposal but also periods and dates during or at which the public was aware of PepsiCo’s proposals.

 

•

PBG stockholders who receive all or part of the merger consideration in respect of their shares in the form of shares of PepsiCo common stock will be able to participate and share in the future earnings or growth of PepsiCo and its subsidiaries or benefit from increases, if any, in the value of PepsiCo and its subsidiaries, following completion of the merger, as well as following completion of the PAS merger, which Pepsico believes support its view as to the fairness of the merger agreement and the merger because (i) it will allow PBG stockholders to participate, subject to the cash election and proration procedures described in this proxy statement/prospectus, in such earnings, growth and increases through the date of the closing of the merger and (ii) it will allow certain PBG stockholders to participate, subject to the cash election and proration procedures described in this proxy statement/prospectus, in such earnings, growth and increases after the date of the closing on a basis that is potentially more tax-efficient than would be the case if such stockholders received cash in the merger and reinvested such cash in PepsiCo shares;

 

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•

PBG stockholders unaffiliated with PepsiCo or Metro and who do not properly exercise and perfect appraisal rights with respect to their shares of PBG common stock may elect to receive the merger consideration for some or all of their shares of PBG common stock in the form of $36.50 in cash, if they do not wish to receive shares of PepsiCo common stock, subject to proration procedures. For those stockholders who receive merger consideration for their shares of PBG common stock in the form of cash, the merger, once completed, will move the risk of PBG’s future financial performance away from public stockholders, who do not have the power to control decisions made with respect to PBG’s business, to PepsiCo, who will have the power to control such decisions pursuant to the completion of the merger. This will eliminate the exposure of such stockholders to fluctuations in the market price of PBG common stock, particularly in the current economic environment, which PepsiCo believes supports its view as to the fairness of the merger; and

 

•

the merger is not subject to a financing condition, which limits the execution risk attached to the completion of the merger, subject to satisfaction of the conditions to the completion of the merger as described in this proxy statement/prospectus, and thus makes it more likely that the merger will be consummated promptly if PBG stockholders approve the merger, which PepsiCo believes supports its view as to the fairness of the merger.

In addition, PepsiCo and Metro believe that the merger is procedurally fair to the unaffiliated stockholders of PBG, based on the following factors:

 

•

vote for approval of the proposal to merger agreement requires the affirmative vote of (i) a majority of the outstanding voting power of the shares of PBG common stock and PBG Class B common stock entitled to vote, voting as a single class, and (ii) a majority of the votes cast by the holders of outstanding shares of PBG common stock entitled to vote, voting separately as a class;

 

•

the PBG Board, by actions taken without the participation of the two directors affiliated with PepsiCo and after considering the unanimous recommendation of the PBG Special Committee (which is comprised entirely of independent directors and which reached its conclusion after consultation with independent legal and financial advisors) and the approval of the audit and affiliated transactions committee of PBG has approved and declared advisable the merger agreement, has determined that it and the merger are fair to and in the best interests of PBG and its unaffiliated stockholders, and has recommended that PBG stockholders vote for approval of the proposal to adopt the merger agreement; and

 

•

the PBG Special Committee requested and received from each of Morgan Stanley and Perella Weinberg an opinion, delivered orally and confirmed in writing on August 3, 2009, with respect to the fairness, from a financial point of view, of the merger consideration to be received by PBG’s unaffiliated stockholders pursuant to the merger agreement.

PepsiCo believes that the process employed by the PBG Board and PBG Special Committee helped produce a transaction that is fair to the unaffiliated stockholders of PBG and accordingly PepsiCo believes this process supports its view as to the fairness of the merger.

PepsiCo and Metro also considered the following factors, each of which they considered to be negative in their considerations concerning the fairness of the terms of the transaction:

 

•

any PBG stockholders who receive merger consideration in the form of cash in exchange for all of their shares of PBG common stock will cease to participate in the future earnings or growth of PepsiCo and its subsidiaries or benefit from increases, if any, in the value of PepsiCo and its subsidiaries, following completion of the merger as well as following completion of the PAS merger;

 

•

as to the merger consideration, PepsiCo’s and Metro’s interests are adverse to the financial interests of PBG’s stockholders unaffiliated with PepsiCo or Metro. In addition, as described under “Interests of Certain Persons in the Merger,” certain executive officers of PepsiCo may have actual or potential conflicts of interest in connection with the merger;

 

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•

the form of merger consideration received by stockholders unaffiliated with PepsiCo and Metro in exchange for their shares of PBG common stock cannot be guaranteed due to proration procedures. If proration procedures are applied as described elsewhere in this proxy statement/prospectus, PBG stockholders may not receive the form of merger consideration that they choose to receive in exchange for their shares of PBG common stock;

 

•

there is a risk that conditions to the completion of the merger or the PAS merger may not be satisfied and, therefore, that either or both mergers may not be completed; and

 

•

the approval of the proposal to adopt the merger agreement does not require the affirmative vote of a majority of only those PBG stockholders who are unaffiliated with PepsiCo or Metro.

PepsiCo and Metro did not find it practicable to assign, nor did either of them assign, relative weights to the individual factors considered in reaching their conclusion as to fairness.

In reaching their conclusion as to fairness, PepsiCo and Metro did not consider the liquidation value of PBG because they consider PBG to be a viable going concern and have no plans to liquidate PBG. The liquidation of PBG was not considered to be a viable course of action based on PepsiCo’s and Metro’s desire for PBG to continue to conduct its business following completion of the merger and remain an integral component of PepsiCo’s overall strategy. Therefore, PepsiCo and Metro believe that the liquidation value of PBG is irrelevant to a determination as to whether the merger is fair to PBG stockholders unaffiliated with PepsiCo or Metro, and no appraisal of liquidation value was sought for purposes of valuing the PBG common stock.

Further, net book value, which is an accounting concept, was not considered as a factor because PepsiCo and Metro believe that net book value is not a material indicator of the value of PBG as a going concern but rather is primarily indicative of historical costs.

PepsiCo and Metro are not aware of any firm offers made by a third party to acquire PBG during the past two years and in any event neither PepsiCo nor Metro, nor any other subsidiary of PepsiCo, has any intention of selling or otherwise disposing of the shares of PBG common stock or PBG Class B common stock that are currently owned by it. Third-party offers were therefore not considered by PepsiCo or Metro in reaching their conclusion as to fairness.

The foregoing discussion of the information and factors considered and given weight by PepsiCo and Metro is not intended to be exhaustive, but includes the factors considered by PepsiCo and Metro that each believes to be material.

Effects of the Merger on PBG

As a result of the merger, PBG will merge with and into Metro. Metro will be the surviving corporation in the merger. After completion of the merger, the certificate of incorporation of Metro in effect as of the effective time of the merger will be the certificate of incorporation of the surviving corporation, and the bylaws of Metro in effect as of the effective time of the merger will be the bylaws of the surviving corporation. PepsiCo has agreed that it will cause to be maintained in effect provisions in the surviving corporation’s certificate of incorporation and bylaws regarding elimination of liability of directors, indemnification of directors, officers and employees and advancement of expenses that are no less advantageous to the intended beneficiaries than the corresponding provisions in existence on the date of the merger agreement. See “Interests of Certain Persons in the Merger—Indemnification and Insurance” beginning on page [—] of this proxy statement/prospectus.

Public Stockholders

Following completion and as a result of the merger, there will no longer be any publicly held shares of PBG common stock. Notwithstanding that certain PBG stockholders will receive all or a portion of the merger consideration in respect of their shares in the form of PepsiCo common stock, PBG’s public stockholders will no

 

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longer have any direct interest in the surviving corporation. Those stockholders who receive all of the merger consideration in respect of their shares in the form of cash will not participate in the surviving corporation’s future earnings and potential growth as a subsidiary of PepsiCo and will no longer bear the risk of any losses incurred in the operation of the surviving corporation’s business as a subsidiary of PepsiCo or of any decreases in the value of that business. Those stockholders receiving shares of PepsiCo common stock as merger consideration for their shares of PBG common stock will only participate in the surviving corporation’s future earnings and potential growth through their ownership of PepsiCo common stock. All of the other incidents of direct stock ownership in PBG, such as the right to vote on certain corporate decisions, to elect directors and to receive dividends and distributions from PBG will be extinguished upon completion of the merger.

Stock Exchange Delisting and Deregistration

As promptly as practicable following completion of the merger, Metro, as successor to PBG, will cause PBG’s common stock to be delisted from the New York Stock Exchange and deregistered under the Exchange Act. Registration under the Exchange Act may be terminated upon application to the SEC if the shares of PBG’s common stock are neither listed on a national securities exchange nor held by 300 or more holders of record. As a result of such deregistration, PBG will no longer be required to file reports with the SEC or otherwise be subject to the United States federal securities laws applicable to public companies.

Effect on Net Book Value and Net Earnings of PepsiCo

The table below sets forth the direct and indirect interest of PepsiCo and Metro in PBG’s net book value and net earnings before and after the merger, based on the historical net book value of PBG as of, and the historical net earnings of PBG for, the year ended December 27, 2008.

 

		Ownership Prior to the Merger								Ownership After the Merger
		Net Book Value				Earnings				Net Book Value				Earnings
		$ (in millions)		%		$ (in millions)		%		$ (in millions)		%		$ (in millions)		%
PepsiCo		446		33.2		54		33.2		1,343		100		162		100
Metro		389		29.0		47		29.0		1,343		100		162		100

Plans for PBG

If the merger is completed, PBG will be merged with and into Metro, and Metro will be the surviving corporation. Following such completion PepsiCo currently expects that the surviving corporation’s operations will be conducted as a dedicated bottling business within PepsiCo and that the surviving corporation will be headquartered in [— ].

PepsiCo has reviewed and will continue to review various potential business strategies that it may consider in the event that the merger is completed. PepsiCo expects to continue to review PBG’s assets, corporate structure, capitalization, operations, properties, policies, management and personnel to consider and determine what other changes, if any, would be appropriate or desirable. PepsiCo expressly reserves the right to make any changes that it deems necessary, appropriate or convenient in light of its review or future developments.

Pursuant to the terms of the merger agreement, PBG will merge with and into Metro, with Metro being the surviving company, and at the effective time of the merger the current officers and directors of Metro (all of whom are employees of PepsiCo) will be the officers and directors of the surviving company.

PepsiCo currently plans that at the closing of the mergers with PBG and PAS it will form a new operating unit that will be called PepsiCo Bottling North America, or PBNA. Eric J. Foss, current chairman and CEO of PBG, will become the CEO of PBNA, reporting directly to PepsiCo Chairman and CEO Indra Nooyi. PBNA will comprise all current PBG and PAS operations in the United States, Canada and Mexico, and will account for

 

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about three-quarters of the volume of PepsiCo’s North American bottling system, with independent franchisees accounting for the rest. PBNA will be separate from PepsiCo’s brand-oriented PepsiCo Americas Beverages (PAB) operating unit, which will continue to oversee independent bottlers and Gatorade and Tropicana operations. Current PBG and PAS operations in Europe and Russia will be managed by PepsiCo’s Europe unit when the mergers are completed.

On December 7, 2009, PepsiCo and Dr Pepper Snapple Group, Inc. (“DPSG”) agreed that upon closing of the mergers PepsiCo will be entitled to manufacture and distribute Dr Pepper and certain other DPSG products in the territories where they are currently sold by PBG and PAS in exchange for a $900 million payment to DPSG.

Except as otherwise described in this proxy statement/prospectus, PepsiCo has no current plans or proposals or negotiations that relate to or would result in: (i) an extraordinary corporate transaction, such as a merger, reorganization or liquidation involving PBG or any of its subsidiaries; (ii) any purchase, sale or transfer of a material amount of assets of PBG or any of its subsidiaries; (iii) any material change in the indebtedness or capitalization of PBG; (iv) any change in the present board of directors or management of PBG, including, but not limited to, any plans or proposals to change the number or the term of directors and to fill any existing vacancies on the PBG Board or to change any material term of the employment contract of any executive officer; or (v) any other material change in PBG’s corporate structure or business. See “—PepsiCo’s Reasons for, and Purpose of, the Merger,” “The Merger Agreement—Structure of the Merger” and “The PAS Merger” beginning on pages [—], [—] and [—], respectively, of this proxy statement/prospectus.”

PepsiCo currently does not intend to declare any dividends on the shares of Metro common stock following completion of the merger, although it reserves the right to change Metro’s dividend policy. PBG’s existing dividend policy provides for the payment of quarterly cash dividends. See “Summary—Share Information and Dividends” and “Summary—Comparative Stock Prices and Dividends” beginning on pages [—] and [—], respectively, of this proxy statement/prospectus.

Certain PBG Forecasts

PBG generally does not make public financial forecasts as to future performance, earnings or other results beyond the current fiscal year, and PBG is especially cautious of making financial forecasts for extended periods due to the unpredictability of the underlying assumptions and estimates. However, PBG provided to its financial advisors certain non-public financial forecasts of PBG on a standalone basis (which are referred to in this proxy statement/prospectus as the PBG forecasts) that were prepared by management for internal planning purposes and not for public disclosure and that are subjective in many respects. PBG has included below a subset of these PBG forecasts to give PBG’s stockholders access to certain non-public information that was furnished to and considered by PBG’s financial advisors.

The PBG forecasts were not prepared with a view toward public disclosure, nor were they prepared with a view toward complying with the published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information or with generally accepted accounting principles, but, in the view of PBG’s management, were prepared on a reasonable basis, reflect the best currently available estimates and judgments, and present, to the best of management’s knowledge and belief, the expected course of action and the expected future financial performance of PBG. However, the PBG forecasts are not fact and should not be relied upon as being necessarily indicative of future results, and readers of this proxy statement/prospectus are cautioned not to place undue reliance on the PBG forecasts.

Neither PBG’s independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the PBG forecasts, nor have they expressed any opinion or any other form of assurance on such PBG forecasts or their achievability, and assume no responsibility for, and disclaim any association with, the PBG forecasts.

 

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The PBG forecasts provided to PBG’s financial advisors included 6-year base and upside projections of revenue and EBITDA, prepared by PBG’s management in the first half of calendar year 2009. These projections of revenue and EBITDA assumed that PBG would continue its business generally as then conducted and that PBG would not take any extraordinary actions, such as dispositions of assets or properties or refinancing of indebtedness.

A chart summarizing fiscal years 2009 through 2014 of the PBG forecasts is set forth below.

Summary Internal Financial Forecast of PBG (in millions)

 

Forecast		2009			2010			2011			2012			2013			2014
Revenue
Base Case		$	13,229		$	13,661		$	14,302		$	15,015		$	15,776		$	16,574
Upside Case		$	13,422		$	14,058		$	14,921		$	15,874		$	16,895		$	17,974
EBITDA
Base Case		$	1,776		$	1,866		$	1,971		$	2,071		$	2,172		$	2,280
Upside Case		$	1,790		$	1,923		$	2,093		$	2,263		$	2,441		$	2,634

The summary of these PBG forecasts is not being included in this proxy statement/prospectus to influence your decision whether to vote for the merger, but because these PBG forecasts were provided by PBG to PBG’s financial advisors. These PBG forecasts were based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of PBG’s management. Important factors that may affect actual results and cause the internal financial forecasts to not be achieved include, but are not limited to, risks and uncertainties relating to PBG’s business (including its ability to achieve strategic goals, objectives and targets over applicable periods), industry performance, the regulatory environment, general business and economic conditions and other factors described under “Forward-Looking Statements” beginning on page [—] of this proxy statement/prospectus. The PBG forecasts also reflect assumptions as to certain business decisions that are subject to change. As a result, actual results may differ materially from those contained in these PBG forecasts. Accordingly, there can be no assurance that the PBG forecasts will be realized.

The inclusion of these PBG forecasts in this proxy statement/prospectus should not be regarded as an indication that PBG or its affiliates, advisors or representatives considered the PBG forecasts to be predictive of actual future events, and the PBG forecasts should not be relied upon as such. Neither PBG or its affiliates, advisors or representatives can give you any assurance that actual results will not differ from these PBG forecasts, and none of them undertakes any obligation to update or otherwise revise or reconcile these PBG forecasts to reflect circumstances existing after the date the PBG forecasts were generated or to reflect the occurrence of future events even in the event that any or all of the assumptions underlying the PBG forecasts are shown to be in error. PBG does not intend to make publicly available any update or other revision to these PBG forecasts. Since the date of the PBG forecasts, PBG has made publicly available its actual results of operations for the quarter and 36 weeks ended September 5, 2009. You should review PBG’s Quarterly Report on Form 10-Q for the quarter ended September 5, 2009 for this information. Neither PBG nor its affiliates, advisors or representatives has made or makes any representation to any stockholder or other person regarding PBG’s ultimate performance compared to the information contained in these PBG forecasts or that forecasted results will be achieved. PBG has made no representation to PBG’s financial advisors or PepsiCo, in the merger agreement or otherwise, concerning the PBG forecasts.

Opinions of PBG’s Financial Advisors

Opinion of Morgan Stanley

PBG retained Morgan Stanley to act as financial advisor in connection with the unsolicited bid by PepsiCo and the merger because of its qualifications, expertise, reputation and knowledge of the business and affairs of PBG. PBG also authorized Morgan Stanley to engage in negotiations on its behalf. In reaching its decision to retain Morgan Stanley, the PBG Board considered Morgan Stanley’s credentials as a financial advisor as well as its prior relationship with PepsiCo and its provision of financial advisory and financing services to PepsiCo in

 

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connection with certain of PepsiCo’s share repurchase programs and debt financing transactions, and determined that Morgan Stanley did not have any conflicts of interest such that it would be unable to act as an independent advisor on behalf of PBG in connection with the PepsiCo proposal. On August 3, 2009, Morgan Stanley rendered its oral opinion, which opinion was subsequently confirmed in a written opinion dated August 3, 2009, to PBG’s special committee and board of directors, to the effect that as of such date and based upon and subject to the assumptions, qualifications and limitations set forth in the written opinion, the consideration to be received by the holders of shares of PBG common stock (other than PepsiCo and its affiliates) pursuant to the merger agreement was fair from a financial point of view to such holders. The PBG Special Committee and the PBG Board expressly adopted the conclusion and analyses of Morgan Stanley as set forth in such opinion. Based on their knowledge that no affiliate of PBG would have an interest in the merger different from, or in addition to, other security holders of PBG (other than PepsiCo and its affiliates) except for board and special committee fees (which are not contingent upon the consummation of the merger or the PBG Special Committee’s recommendation of the merger), indemnification and liability insurance rights under the merger agreement, and the entitlement of such affiliates to receive the merger consideration in respect of their shares of PBG common stock and cash in respect of phantom stock units and restricted stock units, the PBG Board and the PBG Special Committee concluded that they could rely on Morgan Stanley’s fairness opinion, which addressed the fairness of the merger to all stockholders of PBG (other than PepsiCo and its affiliates) in determining that the transaction was fair to all of PBG’s unaffiliated security holders.

The full text of Morgan Stanley’s written fairness opinion dated August 3, 2009, is attached as Appendix B to this proxy statement/prospectus and incorporated by reference herein. You should read the opinion in its entirety for a discussion of the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by Morgan Stanley in rendering its opinion. This summary is qualified in its entirety by reference to the full text of such opinion. Morgan Stanley’s opinion is directed to the PBG Board and the PBG Special Committee, addresses only the fairness from a financial point of view of the consideration to be received by the holders of shares of PBG common stock (other than PepsiCo and its affiliates), and does not address any other aspect of the merger or constitute a recommendation as to how any stockholders of PBG should vote at any stockholders’ meeting held in connection with the merger.

In arriving at its opinion, Morgan Stanley, among other things:

 

•

reviewed certain publicly available financial statements and other business and financial information of PBG and PepsiCo, respectively;

 

•

reviewed certain internal financial statements and other financial and operating data concerning PBG and PepsiCo prepared by the management of PBG and PepsiCo, respectively;

 

•

reviewed the PBG forecasts (see “—Certain PBG Forecasts” beginning on page 67 of this proxy statement/prospectus);

 

•

reviewed information relating to certain strategic, financial and operational benefits anticipated from the merger, prepared by the management of PBG and PepsiCo, respectively;

 

•

discussed the past and current operations and financial condition and the prospects of PBG and PepsiCo, including information relating to certain strategic, financial and operational benefits anticipated from the merger, with senior executives of PBG and PepsiCo, respectively;

 

•

reviewed the pro forma impact of the merger on PepsiCo’s earnings per share, cash flow, consolidated capitalization and financial ratios;

 

•

reviewed the reported prices and trading activity for the PBG common stock and PepsiCo common stock;

 

•

compared the financial performance of PBG and PepsiCo and the prices and trading activity of the PBG common stock and PepsiCo common stock with that of certain other publicly-traded companies comparable with PBG and PepsiCo, respectively, and their securities;

 

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•

reviewed the financial terms, including, but not limited to, multiples and premiums paid of certain comparable acquisition transactions;

 

•

participated in discussions among representatives of PBG and PepsiCo and their financial and legal advisors;

 

•

reviewed the merger agreement and certain related documents; and

 

•

performed such other analyses and considered such other factors as Morgan Stanley deemed appropriate.

In arriving at its opinion, Morgan Stanley assumed and relied upon, without independent verification, the accuracy and completeness of the information that was publicly available or supplied or otherwise made available to Morgan Stanley by PBG and PepsiCo, and formed a substantial basis for its opinion. With respect to the PBG forecasts provided to Morgan Stanley by PBG, as well as information relating to certain strategic, financial and operational benefits anticipated from the merger provided to Morgan Stanley by PBG and PepsiCo, Morgan Stanley assumed that such projections and information had been reasonably prepared on bases reflecting the best currently available estimates and judgments of the respective managements of PBG and PepsiCo regarding the future financial performance of PBG and PepsiCo. In addition, Morgan Stanley assumed that there had not occurred any material change in the assets, financial condition, results of operations, business or prospects of PBG or PepsiCo since the respective dates of the most recent financial statements and other information, financial or otherwise, relating to PBG or PepsiCo, respectively, that were made available to Morgan Stanley. Furthermore, Morgan Stanley assumed that the merger will be consummated in accordance with the terms set forth in the merger agreement without any waiver, amendment or delay of any terms or conditions, including, among other things, that (1) the merger will be treated as a reorganization under the Internal Revenue Code of 1986, as amended (the “Code”) and (2) the aggregate consideration will consist substantially of 50% cash and 50% PepsiCo common stock. Morgan Stanley assumed that in connection with the receipt of all the necessary governmental, regulatory or other approvals and consents required for the merger, no delays, limitations, conditions or restrictions will be imposed that would have a material adverse effect on the contemplated benefits expected to be derived in the merger. Morgan Stanley is not a legal, tax or regulatory advisor. Morgan Stanley is a financial advisor only and relied upon, without independent verification, the assessment of PBG and PepsiCo and PBG’s and PepsiCo’s legal, tax or regulatory advisors with respect to legal, tax and regulatory matters. Morgan Stanley did not address in its opinion, (i) the fairness to, or any other consideration of, the holders of any class of securities (including holders of PBG Class B common stock), creditors or other constituencies of PBG, other than the holders of shares of PBG common stock (other than PepsiCo and its affiliates), (ii) the relative fairness of any portion of the consideration to holders of any series of PBG common stock or (iii) the fairness of the amount or nature of any compensation to be paid or payable to any of PBG’s officers, directors or employees or PBG, or any class of such persons, relative to the consideration to be received by the holders of PBG common stock (other than PepsiCo and its affiliates) in the merger. Morgan Stanley did not make any independent valuation or appraisal of the assets or liabilities of PBG, nor was Morgan Stanley furnished with any such appraisals. Morgan Stanley’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Morgan Stanley as of the date of the opinion. Events occurring after August 3, 2009 may affect Morgan Stanley’s opinion and the assumptions used in preparing it, and Morgan Stanley did not assume any obligation to update, revise or reaffirm this opinion. Morgan Stanley’s opinion was approved by a committee of Morgan Stanley investment banking and other professionals in accordance with its customary practice.

The following is a summary of the material financial analyses used by Morgan Stanley in connection with the provision of its opinion to the PBG Board and the PBG Special Committee. These valuation methodologies are means of calculating the value of PBG on a going concern basis. The financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses used by Morgan Stanley, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Rather, the analyses listed in the tables and described below must be considered as a whole; considering any portion of such analyses and of the factors considered,

 

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without considering all analyses and factors, could create a misleading or incomplete view of the process underlying Morgan Stanley’s fairness opinion. Each of the analyses excludes any synergies that might result from the merger.

PBG Unaffected Trading Range

Morgan Stanley reviewed the unaffected price performance of the PBG common stock for the last twelve months as of April 17, 2009, the last trading day prior to PepsiCo’s initial public announcement of its proposal to acquire PBG. The unaffected trading range of PBG provides historical reference points with respect to the trading prices of PBG common stock prior to PepsiCo’s initial public announcement of its proposal to acquire PBG and allowed Morgan Stanley to compare the unaffected historical share prices with the consideration offered by PepsiCo. Based on daily closing prices, the review indicated that the unaffected 52-week low of PBG common stock was $16.49 as of November 20, 2008 and the unaffected 52-week high of PBG common stock was $34.61 as of April 23, 2008.

In connection with its analysis, Morgan Stanley noted that the consideration to be received by the holders of shares of PBG common stock pursuant to the merger agreement was $36.50 in cash per share or 0.6432 shares of PepsiCo common stock per share (which as of July 31, 2009 had a value of $36.50 per share, calculated by multiplying 0.6432 by the closing price of PepsiCo common stock of $56.75 on that date) (subject to proration and other adjustments as set forth in the merger agreement).

PBG Comparable Trading Analysis

Morgan Stanley reviewed and compared, using publicly available information, certain current and historical financial information for PBG corresponding to current and historical financial information, ratios and public market multiples for other companies that share similar business characteristics with PBG. It was Morgan Stanley’s judgment that Coca Cola Enterprises, Inc. (“CCE”) and PAS were the most directly comparable companies to PBG with respect to PBG’s operations, products, size, geographical scope and historical trading characteristics. However, in Morgan Stanley’s judgment, only CCE was sufficiently comparable for purposes of this analysis, as the trading history of PAS after April 17, 2009 was affected by the public announcement of the proposed acquisition of PAS by PepsiCo.

For purposes of this analysis, Morgan Stanley analyzed the following statistics of CCE for comparative purposes:

 

•

The ratio of the aggregate value, defined as market capitalization plus total debt and minority interest less cash and cash equivalents, to estimated earnings before interest, taxes, depreciation and amortization (“EBITDA”) for calendar years 2009 and 2010; and

 

•

The ratio of price to estimated earnings per share for calendar years 2009 and 2010.

The estimated EBITDA and earnings per share were provided by the Institutional Brokers’ Estimate System, referred to as “IBES”. IBES is a data service that compiles forward-looking financial estimates made by equity research analysts for U.S. publicly traded companies.

The following table provides the estimated 2009 and 2010 EBITDA and earnings per share for PBG and CCE, as of July 31, 2009, based on the median of the equity research estimates, as provided by IBES:

 

PBG:		2009			2010
Estimated EBITDA (in millions)		$	1,811		$	1,870
Estimated Earnings Per Share		$	2.40		$	2.61
CCE:		2009			2010
Estimated EBITDA (in millions)		$	2,613		$	2,713
Estimated Earnings Per Share		$	1.50		$	1.67

The aggregate values of PBG and CCE as of July 31, 2009 were $14.2 billion and $17.7 billion, respectively.

 

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Morgan Stanley applied the multiples based on CCE’s trading performance to the relevant financial statistics of PBG shown above to calculate PBG’s implied prices per share and then averaged the results for the two years. Based on the number of outstanding shares of PBG common stock, restricted stock units and stock options to acquire PBG common stock, Morgan Stanley estimated the implied value per share of PBG common stock as of July 31, 2009 as follows:

 

		Representative Multiple		Implied Value Per Share
Aggregate Value to Estimated EBITDA (average of calendar years 2009 and 2010)		2009: 6.8x, 2010: 6.6x		$26
Price to Estimated Earnings per Share (average of calendar years 2009 and 2010)		2009: 12.5x, 2010: 11.3x		$30

In connection with its analysis, Morgan Stanley noted that the consideration to be received by the holders of shares of PBG common stock pursuant to the merger agreement was $36.50 in cash per share or 0.6432 shares of PepsiCo common stock per share (which as of July 31, 2009 had a value of $36.50 per share, calculated by multiplying 0.6432 by the closing price of PepsiCo common stock of $56.75 on that date) (subject to proration other adjustments as set forth in the merger agreement).

CCE is not identical to PBG. In evaluating the comparable companies, Morgan Stanley made judgments and assumptions with regard to general business, market and financial conditions and other matters, which are beyond the control of PBG, such as the impact of competition on the business of PBG or the industry generally, industry growth and the absence of any material adverse change in the financial condition of PBG or the industry the financial markets in general, which could affect the public trading value of the companies.

PBG Discounted Future Equity Value Analysis

Morgan Stanley performed a discounted future equity value analysis, which is designed to provide insight into the present value of the future price of a company’s common equity as a function of its future earnings per share and its current forward price-to-earnings multiples. Morgan Stanley calculated ranges of implied equity values per share for PBG, based on the median discounted equity values that were implied by equity research analysts estimates of 2011 earnings per share, as provided by IBES. In arriving at the estimated equity values per share of PBG’s common stock, Morgan Stanley applied a 13.0x to 15.0x next twelve-month price-to-earnings multiple range to PBG’s expected 2011 earnings per share as given by these equity research analysts, as provided by IBES, and discounted those values to present value at a discount rate of 10.0%. The 13.0x to 15.0x next twelve-month price-to-earnings multiple range was based on the seven year daily average of the next twelve-month price-to-earnings of PBG, PAS and CCE as of April 17, 2009 (equal to a range from 14.5x to 15.3x), the three year daily average of the next twelve-month price-to-earnings of PBG, PAS and CCE as of April 17, 2009 (equal to a range from 14.0x to 14.4x) and the daily average of the next twelve-month price-to-earnings of PBG, PAS and CCE for the period of September 15, 2008 (the first trading day after Lehman Brother’s bankruptcy filing) through April 17, 2009 (equal to a range from 9.3x to 9.5x). The foregoing next twelve-month price-to-earnings estimates of PBG, PAS and CCE were provided by IBES. Morgan Stanley selected the 13.0x to 15.0x next twelve-month price-to-earnings multiple range based on the median historical next twelve-month price-to-earnings multiples, as provided by IBES, of PBG, PAS and CCE, which Morgan Stanley viewed as sharing similar characteristics with PBG with respect to operations, products, size, geographical scope and historical trading characteristics. Morgan Stanley derived the discount rate of 10.0% by applying the Capital Asset Pricing Model (“CAPM”) formula to calculate PBG’s cost of equity. Based on the calculations set forth above, the analysis implied a value range for PBG’s common stock of approximately $32 to $37 per share.

In connection with its analysis, Morgan Stanley noted that the consideration to be received by the holders of shares of PBG common stock pursuant to the merger agreement was $36.50 in cash per share or 0.6432 shares of PepsiCo common stock per share (which as of July 31, 2009 had a value of $36.50 per share, calculated by multiplying 0.6432 by the closing price of PepsiCo common stock of $56.75 on that date) (subject to proration other adjustments as set forth in the merger agreement).

 

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PBG Precedent Transaction Analysis

Morgan Stanley reviewed and analyzed statistics for selected public non-alcoholic beverage and bottling sector transactions since 1999 with transaction values over $400 million. It was Morgan Stanley’s judgment that a number of the selected transactions, which included PepsiCo, Coca-Cola or Dr. Pepper bottling franchises, were comparable to the proposed acquisition of PBG by PepsiCo due to the similarities amongst the businesses and the sectors involved. PBG also identified its own historical bottler transactions, undertaken since 2000, that were considered to be comparable to the proposed acquisition of PBG by PepsiCo due to the analogous nature of the bottler businesses acquired. Morgan Stanley reviewed and analyzed statistics for those transactions as well. The criteria set forth above were consistently applied, and Morgan Stanley did not exclude any transactions that fell within such criteria. The following list sets forth the selected transactions from both categories that Morgan Stanley reviewed in connection with this analysis:

 

Announcement Year		Target		Acquiror
2009		Better Beverages, Ltd. (Hallettsville, TX)		The Pepsi Bottling Group, Inc.
2009		Pepsi-Cola Bottlers for the Merrimack Valley, Inc.		The Pepsi Bottling Group, Inc.
2008		Lane Affiliated Companies, Inc.		The Pepsi Bottling Group, Inc.
2008		Pepsi-Cola Batavia Bottling Corporation (Batavia, NY)		The Pepsi Bottling Group, Inc.
2007		Coca-Cola Korea Bottling Co., Ltd.		LG Household & Health Care Ltd.
2007		Panamerican Beverages, Inc.		Coca-Cola FEMSA, S.A. de C.V.
2005		Pepsi-Cola Bottling Company of Charlotte, Inc.		The Pepsi Bottling Group, Inc.
2004		Seltzer & Rydholm, Inc. (Auburn, ME)		The Pepsi Bottling Group, Inc.
2003		Pepsi-Cola Buffalo Bottling Corp. (Buffalo, NY)		The Pepsi Bottling Group, Inc.
2003		Olean Bottling Works, Inc. (Olean, NY)		The Pepsi Bottling Group, Inc.
2002		Pepsi-Cola Bottling Co. of Macon (Macon, GA)		The Pepsi Bottling Group, Inc.
2002		Pepsi-Cola Bottling Co. of Aroostook, Inc. (Presque Isle, ME)		The Pepsi Bottling Group, Inc.
2002		Pepsi-Gemex, S.A. de C.V.		The Pepsi Bottling Group, Inc.
2001		Herb Coca-Cola		Coca-Cola Enterprises Inc.
2001		Nor-Cal Beverage Company, Inc. (Northern California)		The Pepsi Bottling Group, Inc.
2001		Pepsi-Cola Elmira Bottling Co., Inc. (Elmira, NY)		The Pepsi Bottling Group, Inc.
2000		PepsiAmericas, Inc.		Whitman Corp.
1999		Dr Pepper Bottling Company of Texas		Cadbury Schweppes plc and The Carlyle Group (The American Bottling Company)

The following table summarizes Morgan Stanley’s analysis:

 

Precedent Transaction Financial Statistic		Representative Multiple Range		Implied Value per Share
Aggregate Value to Last-Twelve- Month (as of June 30, 2009) EBITDA(1)		8.0x -10.0x		$	34 - $50

 

(1)	Based on the median of the estimate for EBITDA, as provided by IBES.

In connection with its analysis, Morgan Stanley noted that the consideration to be received by the holders of shares of PBG common stock pursuant to the merger agreement was $36.50 in cash per share or 0.6432 shares of PepsiCo common stock per share (which as of July 31, 2009 had a value of $36.50 per share, calculated by multiplying 0.6432 by the closing price of PepsiCo common stock of $56.75 on that date) (subject to proration other adjustments as set forth in the merger agreement).

No company or transaction utilized in the precedent transaction analysis is identical to PBG, PepsiCo or the merger. In evaluating the precedent transactions, Morgan Stanley made judgments and assumptions with regard to general business, market and financial conditions and other matters, which are beyond the control of PBG and PepsiCo, such as the impact of competition on the business of PBG, PepsiCo or the industry generally, industry

 

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growth and the absence of any material adverse change in the financial condition of PBG, PepsiCo or the industry or in the financial markets in general, which could affect the public trading value of the companies and aggregate value of the transactions to which they are being compared.

PBG Premiums Paid Analysis

Morgan Stanley compared the premiums paid in North American public company transactions, excluding distressed situations, terminated transactions, ESOPs, self-tenders, spin-offs, minority interest transactions, recapitalizations, and restructurings, that were announced between September 15, 2008 and July 31, 2009, with

transaction values of $1.0 billion and greater. Morgan Stanley also compared the premiums paid in such transactions where 100% of the consideration was paid in the form of cash, in such transactions where 100% of the consideration was paid in the form of acquiror stock, and in such transactions where a mixture of cash and stock was applied. It was Morgan Stanley’s judgment that North American public company transactions of this magnitude and announced subsequent to the bankruptcy of Lehman Brothers were the most comparable to the proposed acquisition of PBG by PepsiCo.

The transactions are listed below:

 

Announcement Date		Target		Acquiror
June 8, 2009		Addax Petroleum Corp.		Sinopec
May 20, 2009		Data Domain, Inc.		NetApp, Inc.
May 12, 2009		Foundation Coal Holdings, Inc.		Alpha Natural Resources, Inc.
April 20, 2009		Sun Microsystems, Inc.		Oracle Corp.
April 8, 2009		Centex Corp.		Pulte Homes, Inc.
April 1, 2009		Metavante Technologies, Inc.		Fidelity National Information Services, Inc.
March 23, 2009		Petro-Canada		Suncor Energy, Inc.
March 12, 2009		CV Therapeutics, Inc.		Gilead Sciences, Inc.
March 9, 2009		Schering Plough Corp.		Merck & Co., Inc.
February 25, 2009		CF Industries Holdings Inc.		Agrium Inc.
January 27, 2009		CV Therapeutics, Inc.		Astellas Pharma Inc.
January 26, 2009		Wyeth		Pfizer Inc.
January 15, 2009		Terra Industries Inc.		CF Industries Holdings, Inc.
January 12, 2009		Advanced Medical Optics, Inc.		Abbott Laboratories
December 1, 2008		Mentor Corp.		Johnson & Johnson
November 7, 2008		Centennial Communications Corp.		AT&T Inc.
October 27, 2008		Embarq Corp.		CenturyTel, Inc.
October 19, 2008		NRG Energy, Inc.		Exelon Corp.
October 6, 2008		ImClone Systems Inc.		Eli Lilly and Co.
September 25, 2008		Tanganyika Oil Co. Ltd.		Sinopec

Morgan Stanley also compared the premiums paid in select affiliated companies transactions that were announced between January 1, 2002 and July 31, 2009 with minimum transaction values of $1.0 billion for majority squeeze-out transactions or minimum transaction values of $500 million for minority squeeze-out transactions, and which involved the acquisition of a stake in a U.S. publicly traded company. It was Morgan Stanley’s judgment that affiliated transactions with these criteria provided an adequate comparison and a robust data set for purposes of its analysis.

 

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The majority squeeze-out transactions used for comparison are listed below:

 

Announcement Date		Target		Acquiror
January 18, 2007		ION Media Networks, Inc.		Citadel Investment Group LLC
June 12, 2006		Pacific Energy Partners LP		Plains All American Pipeline, LP
June 5, 2006		Trizec Properties, Inc.		Investor Group
March 17, 2006		William Lyon Homes		General William Lyon
December 20, 2005		Nextel Partners, Inc.		Sprint Nextel Corp.
September 1, 2005		Chiron Corp.		Novartis AG
December 15, 2003		Gulfterra Energy Partners LP		Enterprise Products Partners LP
September 9, 2002		Dole Food Co., Inc.		David H. Murdock

The minority squeeze-out transactions used for comparison are listed below:

 

Announcement Date		Target		Acquiror
April 27, 2009		Atlas Energy Resources, LLC		Atlas America, Inc.
August 12, 2008		UnionBanCal Corp.		Mitsubishi UFG Financial Group, Inc.
July 21, 2008		Genentech Inc.		Roche Holding Ltd.
March 10, 2008		Nationwide Financial Services, Inc.		Nationwide Mutual Insurance Co.
July 17, 2007		Alfa Insurance Corp.		Alfa Mutual Insurance Co.
January 24, 2007		21st Century Insurance Co.		American International Group, Inc.
November 20, 2006		TD Banknorth Inc.		Toronto-Dominion Bank Financial Group
February 6, 2006		Lafarge North America Inc.		Lafarge S.A.
September 12, 2005		WFS Financial Inc.		Wachovia Corp.
September 1, 2005		7-Eleven, Inc.		Seven-Eleven Japan Co., Ltd.
February 21, 2005		Eon Labs, Inc.		Novartis AG
January 18, 2005		UnitedGlobalCom, Inc.		Liberty Media International, Inc.
January 10, 2005		Fox Entertainment Group, Inc.		News Corp.
August 2, 2004		Cox Communications, Inc.		Cox Enterprises, Inc.
April 10, 2003		Hotels.com		USA Interactive
February 15, 2002		NRG Energy Inc.		Xcel Energy Inc.
February 4, 2002		Intimate Brands Inc.		Limited Inc.

Based on the above, Morgan Stanley selected representative ranges of implied premiums and applied these ranges of premiums to a price of $25.20 per share of PBG common stock which represented the unaffected trading price of PBG common stock as of April 17, 2009, the last trading day prior to PepsiCo’s initial public announcement of a proposal to acquire PBG. The following summarizes Morgan Stanley’s analysis:

 

Precedent Transaction Financial Statistic(1)		Representative Premium Range		Implied Value per Share
Premiums paid in all Cash Consideration Transactions		40% - 150%		$35 -$63
Premiums paid in all Stock Consideration Transactions		30% - 40%		$33 - $35
Premiums paid in all Transactions		60%		$40
Premiums paid in all Affiliated Transactions		15% - 35%		$29 - $34

 

(1)	Premiums were calculated based on the closing share price on the last trading day prior to the official deal announcement or, where applicable, substantiated market rumors or leaks regarding the transaction.

In connection with its analysis, Morgan Stanley noted that the consideration to be received by the holders of shares of PBG common stock pursuant to the merger agreement was $36.50 in cash per share or 0.6432 shares of PepsiCo common stock per share (which as of July 31, 2009 had a value of $36.50 per share, calculated by multiplying 0.6432 by the closing price of PepsiCo common stock of $56.75 on that date) (subject to proration and other adjustments as set forth in the merger agreement).

 

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No company or transaction utilized in the premiums paid analysis is identical to PBG, PepsiCo or the merger. In evaluating the precedent transactions, Morgan Stanley made judgments and assumptions with regard to general business, market and financial conditions and other matters, which are beyond the control of PBG and PepsiCo, such as the impact of competition on the business of PBG, PepsiCo or the industry generally, industry growth and the absence of any material adverse change in the financial condition of PBG, PepsiCo or the industry or in the financial markets in general, which could affect the public trading value of the companies and the aggregate value of the transactions to which they are being compared.

PBG Discounted Cash Flow Analysis

Morgan Stanley calculated ranges of equity values per share for PBG based on discounted cash flow analyses as of July 31, 2009. Morgan Stanley relied on the PBG forecasts (including both the base case and upside case scenarios) for fiscal years 2009 to 2013 as prepared by PBG’s management. Morgan Stanley first calculated the net present value of the unlevered free cash flows of PBG for the period from July 31, 2009 to December 31, 2013. These values were discounted to present values at a range of discount rates between 7.0% and 8.0% with a perpetual growth rate after 2013 of 1.5%. In the case of PBG management base case projections, these calculations resulted in a range of implied values per share of $33 to $42. In the case of PBG management upside case projections, these calculations resulted in a range of implied values per share of $39 to $50. The 7.0%—8.0% discount rate range that Morgan Stanley employed in this analysis was based on Morgan Stanley’s estimate of PBG’s weighted average cost of capital, which was calculated as the weighted average of PBG’s cost of equity of approximately 10.0% (determined through application of the CAPM formula) and PBG’s after-tax cost of debt. Morgan Stanley’s estimate of the perpetuity growth rate of 1.5% equated to the midpoint of a range of perpetuity growth rates of 1.0%—2.0%, determined to be indicative of the potential long-term growth of PBG’s business post 2013. The resulting terminal year next twelve-months multiple of aggregate value to EBITDA implied by the perpetuity growth rate was determined to be generally consistent with the historical multiples of aggregate value to next twelve-month EBITDA for PBG and its comparable peers.

In connection with its analysis, Morgan Stanley noted that the consideration to be received by the holders of shares of PBG common stock pursuant to the merger agreement was $36.50 in cash per share or 0.6432 shares of PepsiCo common stock per share (which as of July 31, 2009 had a value of $36.50 per share, calculated by multiplying 0.6432 by the closing price of PepsiCo common stock of $56.75 on that date) (subject to proration and other adjustments as set forth in the merger agreement).

PepsiCo Unaffected Trading Range

Morgan Stanley reviewed the unaffected price performance of PepsiCo common stock for the last twelve months as of April 17, 2009, the last trading day prior to PepsiCo’s initial public announcement of its proposal to acquire PBG. The unaffected trading range of PepsiCo provides historical reference points with respect to the trading prices of PepsiCo common stock prior to PepsiCo’s initial public announcement of its proposal to acquire PBG and PAS and allowed Morgan Stanley to compare the unaffected historical share prices with the closing price of PepsiCo common stock on July 31, 2009, the last trading day prior to the announcement of the merger, which price was used to determine the stock portion of the consideration offered by PepsiCo. Based on daily closing prices, the review indicated that the unaffected 52-week low of PepsiCo common stock was $45.81 as of March 9, 2009 and the unaffected 52-week high of PepsiCo common stock was $73.23 as of September 18, 2008.

In connection with its analysis, Morgan Stanley noted that the closing price of PepsiCo common stock on July 31, 2009 was $56.75 and that the consideration to be received by the holders of shares of PBG common stock pursuant to the merger agreement was $36.50 in cash per share or 0.6432 shares of PepsiCo common stock per share (subject to proration and other adjustments as set forth in the merger agreement).

PepsiCo Equity Research Price Target Analysis

Morgan Stanley reviewed and analyzed the price targets for the PepsiCo common stock prepared and published by equity research analysts since July 22, 2009 (the date of PepsiCo’s announcement of its second quarter earnings results) through the date of its opinion. These targets reflect each analyst’s estimate of the future

 

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public market-trading price of PepsiCo common stock and are not discounted to reflect present values. The range of undiscounted price targets for the PepsiCo common stock was $60 to $70. The range of price targets for PepsiCo common stock, discounted to present value using a discount rate of 7.0%, was $56 to $65. Morgan Stanley derived the discount rate of 7.0% by applying the CAPM formula to calculate PepsiCo’s cost of equity.

In connection with its analysis, Morgan Stanley noted that the closing price of PepsiCo common stock on July 31, 2009 was $56.75.

The public market trading price targets published by the equity research analysts do not necessarily reflect current market trading prices for PepsiCo common stock and these estimates are subject to uncertainties, including the future financial performance of PepsiCo and future financial market conditions.

PepsiCo Comparable Trading Analysis

Morgan Stanley reviewed and compared, using publicly available information, certain current and historical financial information for PepsiCo corresponding to current and historical financial information, ratios and public market multiples for other companies that share similar business characteristics with PepsiCo.

The comparable companies used in this analysis are as follows:

 

•

The Coca-Cola Co.

 

•

Dr Pepper Snapple Group, Inc.

 

•

Hansen Natural Corporation

Each of these companies was thought to share similarities with PepsiCo with respect to operations, products, size, geographical scope and/or historical trading characteristics.

For purposes of this analysis, Morgan Stanley analyzed the following statistics of each of these companies for comparative purposes:

 

•

The ratio of aggregate value to estimated EBITDA for calendar years 2009 and 2010; and

 

•

The ratio of price to estimated earnings per share for calendar years 2009 and 2010.

The estimated EBITDA and earnings per share were provided by IBES.

The following table provides the estimated 2009 and 2010 EBITDA and earnings per share for PepsiCo, The Coca-Cola Co., Dr. Pepper Snapple Group Inc., and Hansen Natural Corporation, as of July 31, 2009, based on the median of the equity research estimates, as provided by IBES:

PepsiCo:

 

		2009			2010
Estimated EBITDA (in millions)		$	9,602		$	10,269
Estimated Earnings Per Share		$	3.69		$	4.04

The Coca-Cola Co.:

 

 

		2009			2010
Estimated EBITDA (in millions)		$	9,877		$	10,827
Estimated Earnings Per Share		$	3.03		$	3.33

Dr. Pepper Snapple Group, Inc.:

 

		2009			2010
Estimated EBITDA (in millions)		$	1,160		$	1,189
Estimated Earnings Per Share		$	1.76		$	1.91

Hansen Natural Corporation:

 

		2009			2010
Estimated EBITDA (in millions)		$	338		$	377
Estimated Earnings Per Share		$	2.28		$	2.54

 

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The aggregate values of PepsiCo, The Coca-Cola Company, Dr. Pepper Snapple Group, Inc. and Hansen Natural Corporation, as of July 31, 2009, were $95.8 billion, $119.7 billion, $9.5 billion and $2.7 billion, respectively.

Based on the analysis of the relevant metrics for each of the comparable companies, Morgan Stanley selected representative ranges of financial multiples of the comparable companies and applied these ranges of multiples to the relevant PepsiCo financial statistics shown above. Based on PepsiCo’s current number of outstanding shares, restricted stock units and stock options, Morgan Stanley estimated the implied value per PepsiCo common stock as of July 31, 2009 as follows:

 

		Representative Multiple Range		Implied Value per Share
Aggregate Value to Estimated Calendar Year 2009 EBITDA		9.0x - 10.5x		$53 - $63
Aggregate Value to Estimated Calendar Year 2010 EBITDA		8.5x - 10.0x		$54 - $64
Price to Estimated Calendar Year 2009 Earnings per Share		14.0x - 17.0x		$52 - $63
Price to Estimated Calendar Year 2010 Earnings per Share		13.0x - 15.0x		$52 - $61

In connection with its analysis, Morgan Stanley noted that the closing price of PepsiCo common stock on July 31, 2009 was $56.75.

No company utilized in the comparable company analysis is identical to PepsiCo. In evaluating the comparable companies, Morgan Stanley made judgments and assumptions with regard to general business, market and financial conditions and other matters, which are beyond the control of PepsiCo, such as the impact of competition on the business of PepsiCo or the industry generally, industry growth and the absence of any material adverse change in the financial condition of PepsiCo or the industry or in the financial markets in general, which could affect the public trading value of the companies. Mathematical analysis (such as determining the average or median) is not in itself a meaningful method of using peer group data.

PepsiCo Discounted Future Equity Value Analysis

Morgan Stanley also performed a discounted future equity value analysis for PepsiCo. Morgan Stanley calculated ranges of implied equity values per share for PepsiCo, based on discounted equity values that were based on estimates of equity research analysts of 2011 estimated earnings per share. In arriving at the estimated equity values per share of PepsiCo’s common stock, Morgan Stanley applied a 16.0x to 18.0x next twelve-month price-to-earnings multiple range to PepsiCo’s expected 2011 earnings per share as given by these equity research analysts and discounted those values to present value at an assumed discount rate of 7.0%. Morgan Stanley selected the 16.0x to 18.0x next twelve-month price-to-earnings multiple based on the median historical next twelve-month price-to-earnings multiples of PepsiCo and its other comparable companies that Morgan Stanley viewed as sharing similar characteristics with PepsiCo, namely The Coca-Cola Co., Dr. Pepper Snapple Group, Inc. and Hansen Natural Corporation, as provided by IBES. The 16.0x to 18.0x next twelve-month price-to-earnings multiple range was based on the seven year daily average of the next twelve-month price-to-earnings of PepsiCo and The Coca-Cola Co. as of April 17, 2009 (equal to 19.1x and 19.9x, respectively), the three year daily average of the next twelve-month price-to-earnings of PepsiCo, The Coca-Cola Co. and the Hansen Natural Corporation as of April 17, 2009 (equal to a range from 17.8x to 23.5x) and the daily average of the next twelve-month price-to-earnings of PepsiCo, The Coca-Cola Co., Dr. Pepper Snapple Group, Inc., and Hansen Natural Corporation for the period of September 15, 2008 (the first trading day after Lehman Brother’s bankruptcy filing) through April 17, 2009 (equal to a range from 9.6x to 14.8x). The foregoing next twelve-month price-to-earnings estimates of PepsiCo, The Coca-Cola Co., Dr. Pepper Snapple Group, Inc., and Hansen Natural Corporation were provided by IBES. Each of these companies was thought to share similarities with PepsiCo with respect to operations, products, size, geographical scope and/or historical trading characteristics. Morgan Stanley derived the discount rate of 7.0% by applying the CAPM formula to calculate PepsiCo’s cost of equity. Based on the calculations set forth above, this analysis implied a value range for PepsiCo’s common stock of approximately $65 to $73 per share.

 

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In connection with its analysis, Morgan Stanley noted that the closing price of PepsiCo common stock on July 31, 2009 was $56.75.

PepsiCo Discounted Cash Flow Analysis

Morgan Stanley also calculated a range of equity values per share for PepsiCo based on a discounted cash flow analysis as of July 31, 2009. Morgan Stanley relied on the median of equity research estimates for fiscal years 2009 to 2011, including estimates of PepsiCo revenues for fiscal years 2009 to 2011 of $43.4 billion, $45.6 billion and $48.2 billion, respectively, and estimates of PepsiCo EBITDA of $9.6 billion, $10.3 billion and $10.9 billion, respectively. The foregoing estimates were based on the median of equity research estimates as of July 31, 2009, as provided by IBES.

Morgan Stanley also relied on extrapolations from such projections for fiscal years 2012 and 2013 based on ratios and growth trends from prior years. Morgan Stanley extrapolated such projections by keeping the estimates for revenue growth for 2011 constant, holding operating margins beyond 2011 constant and basing certain items, including capital expenditures, bottling equity income and minority interest, on equity research reports issued after PepsiCo’s announcement of its second quarter results. Extrapolated revenue for fiscal years 2012 and 2013 were $51.0 billion and $54.0 billion, respectively, and extrapolated EBITDA was $11.6 billion for 2012 and $12.3 billion for 2013.

These extrapolations were not prepared with a view toward public disclosure, nor were they prepared with a view toward compliance with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information, or generally accepted accounting principles. These extrapolations were calculated by Morgan Stanley, not PepsiCo, and were not reviewed, or approved by PepsiCo or PBG. In addition, these extrapolations were not prepared with the assistance of, or reviewed, compiled or examined by, PBG’s independent registered public accounting firm or any other independent accountants.

The extrapolated results were based on variables and assumptions that are inherently uncertain and may be beyond the control of PepsiCo and PBG. Important factors that may affect actual results and cause these extrapolations not to be achieved include, but are not limited to, risks and uncertainties described under “Forward-Looking Statements” beginning on page [—] of this proxy statement/prospectus. These extrapolated results also reflect assumptions as to certain business decisions that are subject to change. As a result, actual results may differ materially from those contained in the extrapolations. Accordingly, there can be no assurance that these extrapolated results will be realized or that future financial results will not materially vary from these extrapolations.

The inclusion of these extrapolations in this document should not be regarded as an indication that PBG or its affiliates, advisors or representatives considered these extrapolated results to be predictive of actual future events, and these forecasts should not be relied upon as such. Neither PBG nor its affiliates, advisors or representatives can give you any assurance that actual results will not differ from these extrapolations, and none of them undertakes any obligation to update or otherwise revise or reconcile these extrapolations to reflect circumstances existing after the date these extrapolations were generated or to reflect the occurrence of future events, including the merger or any of the transactions contemplated by the merger agreement, even in the event that any or all of the assumptions underlying these extrapolations are shown to be in error. PBG does not intend to make publicly available any update or other revision to these extrapolations.

Morgan Stanley calculated the net present value of the unlevered free cash flows of PepsiCo for the period from July 31, 2009 to December 31, 2013. These values were discounted to present values at a range of discount rates between 6.5% and 7.5% with a perpetual growth rate after 2013 of 1.5%, which resulted in a range of implied values per share of $68 to $81. The 6.5% - 7.5% discount rate range that Morgan Stanley employed in this analysis was based on Morgan Stanley’s estimate of PepsiCo’s weighted average cost of capital, which was

 

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calculated as the weighted average of PepsiCo’s cost of equity of approximately 7.0% (determined through application of the CAPM formula) and PepsiCo’s after-tax cost of debt (circa 4.0%). Morgan Stanley’s estimate of the perpetuity growth rate of 1.5% equated to the midpoint of a range of perpetuity growth rates of 1.0% -2.0%, determined to be indicative of the potential long-term growth of PepsiCo’s business post 2013. Furthermore, the resulting terminal year next twelve-months multiple of aggregate value to EBITDA implied by the perpetuity growth rate was determined to be generally consistent with historical multiples of aggregate value to next twelve-month EBITDA for PepsiCo and its comparable peers.

In connection with its analysis, Morgan Stanley noted that the closing price of PepsiCo common stock on July 31, 2009 was $56.75.

Pro Forma Analysis

Morgan Stanley analyzed the pro forma impact of the merger on PepsiCo’s earnings per share. This analysis is important given the form of consideration being offered by PepsiCo to the PBG stockholders. Morgan Stanley assumed the consideration to be received by holders of shares of PBG common stock pursuant to the merger was $36.50 in cash per share or 0.6432 shares of PepsiCo common stock per share (subject to proration and other adjustments as set forth in the merger agreement) and that the aggregate consideration will consist substantially of 50% cash and 50% of PepsiCo common stock. Based on this analysis, Morgan Stanley observed that the merger would result in earnings per share accretion for PepsiCo stockholders in 2010 of $0.04 or 1.0%. For 2011, Morgan Stanley observed that the merger would result in earnings per share accretion for PepsiCo stockholders of $0.09 or 1.9%. In each case, the analysis excluded one-time charges. This accretion, which was determined on a pre-synergy basis, implies that PepsiCo would realize an increase in earnings that could result in an increase in the price of PepsiCo’s stock and indicates that PBG stockholders who will become stockholders of PepsiCo may also realize the benefits of the transaction after the consummation of the merger.

Miscellaneous

In connection with the review of the merger by the PBG Board and PBG Special Committee, Morgan Stanley performed a variety of financial and comparative analyses for purposes of rendering its opinion. The preparation of a financial opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. In arriving at its opinion, Morgan Stanley considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor it considered. Morgan Stanley believes that selecting any portion of its analyses, without considering all analyses as a whole, would create an incomplete view of the process underlying its analyses and opinion. In addition, Morgan Stanley may have given various analyses and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions. As a result, the ranges of valuations resulting from any particular analysis described above should not be taken to be Morgan Stanley’s view of the actual value of PBG. In performing its analyses, Morgan Stanley made numerous assumptions with respect to industry performance, general business and economic conditions and other matters. Many of these assumptions are beyond the control of PBG. Any estimates contained in Morgan Stanley’s analyses are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by such estimates.

Morgan Stanley conducted the analyses described above solely as part of its analysis of the fairness of the consideration to be received by holders of shares of PBG common stock (other than PepsiCo and its affiliates) pursuant to the merger agreement from a financial point of view to such holders and in connection with the delivery of its opinion to the PBG Board and PBG Special Committee. These analyses do not purport to be appraisals or to reflect the prices at which shares of PBG common stock or PepsiCo common stock might actually trade.

 

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The consideration to be paid pursuant to the merger agreement was determined through negotiations between PBG and PepsiCo and was approved by each company’s board of directors. Morgan Stanley provided advice to PBG during these negotiations. Morgan Stanley did not, however, recommend any specific merger consideration to PBG or that any specific consideration constituted the only appropriate consideration for the merger. Morgan Stanley was not authorized to solicit, and did not solicit, interest from any party with respect to the acquisition, business combination or other extraordinary transaction involving PBG, nor did Morgan Stanley negotiate with any parties, other than PepsiCo, which expressed interest in the possible acquisition of PBG.

Morgan Stanley’s opinion and its presentation to the PBG Board and PBG Special Committee was one of many factors taken into consideration by the PBG Board and PBG Special Committee in deciding to approve, adopt and authorize the merger agreement. Consequently, the analyses as described above should not be viewed as determinative of the opinion of the PBG Board and PBG Special Committee with respect to the consideration to be received by the holders of shares of PBG common stock pursuant to the merger agreement or of whether the PBG Board and PBG Special Committee would have been willing to agree to a different merger consideration.

Morgan Stanley is a global financial services firm engaged in the securities, investment management and individual wealth management businesses. Morgan Stanley’s securities business is engaged in securities underwriting, trading and brokerage activities, foreign exchange, commodities and derivatives trading, prime brokerage, as well as providing investment banking, financing and financial advisory services. Morgan Stanley, its affiliates, directors and officers may at any time invest on a principal basis or manage funds that invest, hold long or short positions, finance positions, and may trade or otherwise structure and effect transactions for their own account or the accounts of its customers, in debt or equity securities or loans of PBG, PepsiCo or any other company, or any currency or commodity, that may be involved in the merger, or any related derivative instrument. In the two years prior to the date of its opinion, Morgan Stanley has provided financial advisory and financing services for PBG and PepsiCo and has received customary fees in connection with such services. For PBG, such services have primarily included, though were not limited to, advisory services in connection with PBG’s acquisition of Lebedyansky JSC’s juice business and financing services in connection with secured and unsecured debt financing transactions effected by PBG. For these services, Morgan Stanley has been paid fees of approximately $14 million in aggregate. For PepsiCo, such services have primarily included, though were not limited to, advisory services in connection with certain of PepsiCo’s share repurchase programs and financing services in connection with certain secured and unsecured debt financing transactions effected by PepsiCo. For these services, PepsiCo has paid Morgan Stanley fees of approximately $5.5 million in aggregate. Morgan Stanley may also seek to provide such services to PepsiCo in the future and expects to receive fees for the rendering of these services. As compensation for its services in connection with the merger, PBG has agreed to pay Morgan Stanley a fee of $43 million, of which $27 million is payable upon the closing of the merger. $16 million of such $27 million would remain payable if the merger is not consummated and PBG remains independent, and the PBG Board will consider, in its sole discretion, payment to Morgan Stanley of an additional discretionary fee in such case. PBG took the existence of these contingent fees into account when considering the analysis, advice and opinion of Morgan Stanley. PBG has also agreed to reimburse Morgan Stanley for certain expenses incurred by Morgan Stanley, including fees of outside legal counsel, and to indemnify Morgan Stanley and related parties against certain liabilities and expenses arising out of Morgan Stanley’s engagement.

Perella Weinberg

PBG retained Perella Weinberg to act as financial advisor to the PBG Special Committee for the purpose of providing an opinion to evaluate the fairness, from a financial point of view, of the consideration to be received in the merger by holders of shares of PBG common stock, other than PepsiCo or any affiliate of PepsiCo. The PBG Special Committee selected Perella Weinberg based on Perella Weinberg’s qualifications, expertise and reputation and its knowledge of the industries in which PBG conducts its business. Perella Weinberg, as part of its investment banking business, is continually engaged in performing financial analyses with respect to businesses and their securities in connection with mergers and acquisitions, leveraged buyouts and other transactions as well as for corporate and other purposes.

 

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The PBG Special Committee requested that Perella Weinberg evaluate the fairness, from a financial point of view, of the consideration to be received in the merger by holders of shares of PBG common stock, other than PepsiCo or any affiliate of PepsiCo. On August 3, 2009, Perella Weinberg rendered its oral opinion, subsequently confirmed in writing, to the PBG Board and PBG Special Committee, that, on August 3, 2009, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth in such opinion, the merger consideration to be received by the holders of shares of PBG common stock, other than PepsiCo or any affiliate of PepsiCo, in the merger was fair, from a financial point of view, to such holders. The PBG Special Committee and the PBG Board expressly adopted the conclusion and analyses of Perella Weinberg as set forth in such opinion. Based on their knowledge that no affiliate of PBG would have an interest in the merger different from, or in addition to, other security holders of PBG (other than PepsiCo and its affiliates) except for board and special committee fees (which are not contingent upon the consummation of the merger or the PBG Special Committee’s recommendation of the merger), indemnification and liability insurance rights under the merger agreement, and the entitlement of such affiliates to receive the merger consideration in respect of their shares of PBG common stock and cash in respect of phantom stock units and restricted stock units, the PBG Board and the PBG Special Committee concluded that they could rely on Perella Weingerg’s fairness opinion, which addressed the fairness of the merger consideration to be received by all stockholders of PBG (other than PepsiCo and its affiliates) in determining that the transaction was fair to all of PBG’s unaffiliated security holders.

The full text of Perella Weinberg’s written opinion, dated August 3, 2009, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken by Perella Weinberg, is attached as Appendix C to this proxy statement/prospectus and is incorporated by reference herein. Holders of shares of PBG common stock are urged to read the opinion carefully and in its entirety. The opinion does not address PBG’s underlying business decision to enter into the merger or the relative merits of the merger as compared with any other strategic alternative which may be available to PBG nor does it address the relative merits of the PAS merger. The opinion does not constitute a recommendation to any holder of PBG common stock or holder of PepsiCo common stock as to how such holder should vote or otherwise act with respect to the merger or any other matter. In addition, Perella Weinberg expressed no opinion as to the fairness of the merger to, or any consideration received in connection with the merger by, the holders of any other class of securities (including PBG’s Class B common stock), creditors or other constituencies of PBG. Perella Weinberg provided its opinion for the information and assistance of the PBG Board and the PBG Special Committee in connection with, and for the purposes of, their evaluation of the merger. This summary is qualified in its entirety by reference to the full text of the opinion.

In arriving at its opinion, Perella Weinberg, among other things:

 

•

reviewed certain publicly available financial statements and other business and financial information with respect to PBG and PepsiCo, including research analyst reports;

 

•

reviewed the PBG forecasts (see “—Certain PBG Forecasts” beginning on page [—] of this proxy statement/prospectus);

 

•

reviewed certain publicly available financial forecasts relating to PepsiCo (the “PepsiCo Public Forecasts”);

 

•

reviewed information relating to certain strategic, financial and operational benefits anticipated from the merger, prepared by the management of PBG;

 

•

discussed the past and current business, operations, financial condition and prospects of PBG and PepsiCo, including information relating to certain strategic, financial and operational benefits anticipated from the merger, with senior executives of PBG and PepsiCo;

 

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•

reviewed the pro forma financial impact of, among other things, the merger on the future financial performance of PepsiCo, including the potential impact on PepsiCo’s estimated earnings per share;

 

•

compared the financial performance of PBG and PepsiCo with that of certain publicly-traded companies which it believed to be generally relevant;

 

•

compared the financial terms of the merger with the publicly available financial terms of certain transactions which it believed to be generally relevant;

 

•

reviewed the historical trading prices and trading activity for shares of PBG common stock and PepsiCo common stock, and compared such price and trading activity of shares of PBG common stock and shares of PepsiCo common stock with that of securities of certain publicly-traded companies which it believed to be generally relevant;

 

•

reviewed a draft, dated August 3, 2009, of the merger agreement; and

 

•

conducted such other financial studies, analyses and investigations, and considered such other factors, as it deemed appropriate.

In arriving at its opinion, Perella Weinberg assumed and relied upon, without independent verification, the accuracy and completeness of the financial and other information supplied or otherwise made available to it (including information that was available from generally recognized public sources) for the purposes of its opinion and further assumed, with the consent of the PBG Board and the PBG Special Committee, that information furnished by PBG for purposes of Perella Weinberg’s analysis did not contain any material omissions or misstatements of material fact. With respect to the PBG forecasts, as well as information relating to certain strategic, financial and operational benefits anticipated from the merger, Perella Weinberg was advised by management of PBG, and assumed, with the consent of the PBG Board and the PBG Special Committee, that they had been reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of management of PBG as to future financial performance of PBG and the other matters covered thereby and Perella Weinberg expressed no view as to the assumptions on which they were based. Perella Weinberg was not provided with, and did not have access to, financial forecasts relating to PepsiCo prepared by the management of PepsiCo. Accordingly, Perella Weinberg was advised by management of PepsiCo, and assumed, that the PepsiCo Public Forecasts were a reasonable basis upon which to evaluate the future financial performance of PepsiCo and Perella Weinberg used the PepsiCo Public Forecasts in performing its analyses. In arriving at its opinion, Perella Weinberg did not make any independent valuation or appraisal of the assets or liabilities (including any contingent, derivative or off-balance-sheet assets and liabilities) of PBG or PepsiCo, nor was it furnished with any such valuations or appraisals. In addition, Perella Weinberg did not evaluate the solvency of any party to the merger agreement under any state or federal laws relating to bankruptcy, insolvency or similar matters.

Perella Weinberg assumed that the merger would be consummated in accordance with the terms set forth in the draft merger agreement, without material modification, waiver or delay. Perella Weinberg also assumed that the final executed merger agreement would not differ in any material respect from the draft merger agreement reviewed by it. In addition, Perella Weinberg assumed that in connection with the receipt of all the necessary approvals of the merger, no delays, limitations, conditions or restrictions would be imposed that would have an adverse effect on PBG, PepsiCo or the contemplated benefits expected to be derived in the merger. Perella Weinberg also assumed that the merger would qualify as a tax-free reorganization under the Code. In addition, Perella Weinberg assumed, with the consent of the PBG Board and the PBG Special Committee, that the aggregate merger consideration would substantially consist of 50% cash and 50% PepsiCo common stock. Perella Weinberg relied as to all legal matters relevant to rendering its opinion upon the advice of counsel.

Perella Weinberg’s opinion addressed only the fairness from a financial point of view, as of the date hereof, of the merger consideration to be received by the holders of shares of PBG common stock, other than PepsiCo or

 

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any affiliate of PepsiCo, pursuant to the merger agreement. Perella Weinberg was not asked to, nor did it, offer any opinion as to any other term of the merger agreement or the form or structure of the merger or the likely timeframe in which the merger would be consummated. Perella Weinberg was not requested to, and did not, participate in the negotiation of the terms of the merger, and it was not requested to, and did not, provide any advice or services in connection with the merger other than the delivery of its opinion. Perella Weinberg expressed no view or opinion as to any such matters. In addition, Perella Weinberg expressed no opinion as to the fairness of the amount or nature of any compensation to be received by any officers, directors or employees of any parties to the merger, or any class of such persons, relative to the merger consideration. Perella Weinberg did not express any opinion as to any tax or other consequences that may result from the transactions contemplated by the merger agreement, nor does its opinion address any legal, tax, regulatory or accounting matters, as to which Perella Weinberg understood PBG has received such advice as it deemed necessary from qualified professionals. Perella Weinberg’s opinion did not address the underlying business decision of PBG to enter into the merger or the relative merits of the merger as compared with any other strategic alternative which may be available to PBG nor did it address the relative merits of the PAS merger. Perella Weinberg was not authorized to solicit, and did not solicit, indications of interest in a transaction with PBG from any party.

Perella Weinberg’s opinion was not intended to be and does not constitute a recommendation to any holder of shares of PBG common stock or holder of shares of PepsiCo common stock as to how to vote or otherwise act with respect to the merger or any other matter and does not in any manner address the prices at which shares of PBG common stock or shares of PepsiCo common stock will trade at any time. In addition, Perella Weinberg expressed no opinion as to the fairness of the merger to, or any consideration received in connection with the merger by, the holders of any other class of securities (including PBG Class B common stock), creditors or other constituencies of PBG. Perella Weinberg’s opinion is necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Perella Weinberg as of, the date of its opinion. It should be understood that subsequent developments may affect Perella Weinberg’s opinion and the assumptions used in preparing it, and Perella Weinberg does not have any obligation to update, revise, or reaffirm its opinion.

The following is a brief summary of the material financial analyses performed by Perella Weinberg and reviewed by the PBG Board and the PBG Special Committee in connection with Perella Weinberg’s opinion relating to the merger and does not purport to be a complete description of the financial analyses performed by Perella Weinberg. Some of these valuation methodologies, including the precedent transactions analysis and the discounted cash flow analysis, are means of calculating the value of PBG on a going concern basis. The order of analyses described below does not represent the relative importance or weight given to those analyses by Perella Weinberg. Some of the summaries of the financial analyses include information presented in tabular format. In order to fully understand Perella Weinberg’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Perella Weinberg’s financial analyses. Except as otherwise noted, for purposes of its analyses, Perella Weinberg used street projections for both PBG and PepsiCo, which are referred to herein as Street Projections, and the PBG forecasts (which consisted of two sets of projections, referred to herein as Management Base Case and Management Upside Case) for PBG. Except as otherwise noted, the number of fully diluted shares of PBG common stock was based on information set forth in PBG’s Form 10-Q for the period ended June 13, 2009.

Historical Stock Trading and Transaction Premium Analysis

Perella Weinberg reviewed the historical trading price per share of PBG common stock on April 17, 2009, the last trading day prior to the April 19 proposal to PBG which is referred to in this proxy statement/prospectus as the “Unaffected Price Date” and the one-year period ending on July 31, 2009, the last trading day prior to the date on which Perella Weinberg gave its opinion. In addition, Perella Weinberg calculated the implied premium represented by the merger consideration relative to the following:

 

•

the closing sale price per share of PBG common stock on the Unaffected Price Date;

 

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•

the closing sale price per share of PBG common stock as of July 31, 2009;

 

•

each of the highest and lowest intra-day sale price per share of PBG common stock during the one-year period ended on the Unaffected Price Date; and

 

•

each of the average closing sale price per share of PBG common stock during the 30-day, 60-day and 90-day periods ended on the Unaffected Price Date as provided by FactSet.

The results of these calculations and reference points are summarized in the following table:

 

		Premium/(Discount)
		Price Per Share			Initial Offer			Final Offer
Closing Price on July 31, 2009		$	33.95		(13.1	)%		7.5	%
Closing Price on the Unaffected Price Date		$	25.20		17.1	%		44.8	%
52-week high		$	35.10		(16.0	)%		4.0	%
52-week low		$	15.78		86.9	%		131.3	%
30-day average		$	22.98		28.4	%		58.8	%
60-day average		$	20.98		40.6	%		73.9	%
90-day average		$	20.83		41.6	%		75.2	%

The historical stock trading and transaction premium analysis provided reference points with respect to the trading prices of PBG common stock which enabled Perella Weinberg to compare the historical prices with the consideration offered by PepsiCo. Perella Weinberg also noted the highest and lowest closing sale price per share of PepsiCo common stock during the one-year period ended on the Unaffected Price Date were approximately $44.00 to $75.00 per share.

Implied Transaction Multiples

In performing this analysis, Perella Weinberg first derived implied enterprise values for PBG based on the closing sale price per share of PBG common stock on the Unaffected Price Date and the merger consideration to be received by the holders of shares of PBG common stock. The implied enterprise values were derived by calculating equity values of PBG by multiplying the number of fully diluted shares of PBG common stock by the closing sale price per share of PBG common stock on the Unaffected Price Date and by the merger consideration to be received by the holders of shares of PBG common stock in the merger, and then, in each case, adding net debt and minority interest of PBG as of June 13, 2009, based on information set forth in PBG’s Form 10-Q for the period then ended.

Perella Weinberg calculated the following multiples and ratios of historical and estimated financial results:

 

•

enterprise value (“EV”) as a multiple of last twelve months (“LTM”) EBITDA based on Management Base Case;

 

•

EV as a multiple of estimated EBITDA for fiscal years 2009 and 2010 based on each of Management Base Case and Street Projections;

 

•

the ratio of price per share to estimated earnings per share (“EPS”), or price-to-earnings (“P/E”) ratio, for fiscal years 2009 and 2010 based on each of Management Base Case and Street Projections;

 

•

EV as a multiple of next twelve month (“NTM”) EBITDA based on Street Projections;

 

•

the ratio of price per share to NTM EPS based on Street Projections.

 

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The results of these analyses are summarized in the following table:

 

		Based on Closing Price of     Unaffected Price Date		Based on Merger     Consideration
EV/LTM EBITDA
Management Base Case		6.7x		8.3x
EV/2009E EBITDA
Management Base Case		6.8x		8.3x
Street Projections		6.6x		8.1x
EV/2010 EBITDA
Management Base Case		6.5x		7.9x
Street Projections		6.2x		7.7x
Price/2009E EPS
Management Base Case		10.6x		15.3x
Street Projections		10.5x		15.2x
Price/2010E EPS
Management Base Case		9.5x		13.8x
Street Projections		9.6x		14.0x
EV/NTM EBITDA
Street Projections		6.5x		8.0x
Price/NTM EPS
Street Projections		10.0x		14.5x

Equity Research Analyst Price Targets Statistics

Perella Weinberg reviewed and analyzed the price targets for PBG common stock and PepsiCo common stock prepared and published by equity research analysts during the period from February 11, 2009 through July 29, 2009. The time frame chosen by Perella Weinberg reflected the most recent research published on PBG and PepsiCo by each analyst from each of the firms listed below at the time of Perella Weinberg’s presentation to the PBG Special Committee and the PBG Board of Directors. The following equity analyst price targets were reviewed and such targets reflect each analyst’s estimate of the future public market trading price of PBG common stock and PepsiCo common stock and are not discounted to reflect present values:

PBG:

 

				Price Target
Analyst		Report Date		As of July 31, 2009		As of Unaffected Price Date
Credit Suisse		7/29/2009		$35.00		$24.00
UBS		7/9/2009		$39.00		$31.00
Barclays		7/8/2009		$36.00		$20.00
Deutsche Bank		7/8/2009		$34.00		$25.00
Goldman Sachs		7/8/2009		$37.50		$23.00
Stifel Nicolaus		7/8/2009		$37.00		NA
JP Morgan		7/7/2009		$29.00		$25.00
Citi		6/2/2009		$33.00		$28.00
Bank of America/Merrill Lynch		2/11/2009		$21.00		$21.00

 

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PepsiCo:

 

Analyst		Report Date		Price Target as of July 31, 2009
Credit Suisse		7/23/09		$	60.00
Deutsche Bank		7/23/09		$	62.00
JP Morgan		7/22/09		$	62.00
Stifel Nicolaus		7/22/09		$	64.00
UBS		7/22/09		$	62.00
Barclays		7/22/09		$	63.00
Goldman Sachs		7/22/09			NA
Citi		5/7/09		$	69.00
Bank of America/Merrill Lynch		5/5/09		$	55.00

Perella Weinberg noted that the range of undiscounted equity analyst price targets for PBG common stock prior to the Unaffected Price Date was between approximately $20.00 and $31.00 per share and the range of undiscounted equity analyst price targets for PBG common stock after the Unaffected Price Date was between approximately $21.00 and $39.00 per share. Perella Weinberg also noted that the range of undiscounted equity analyst price targets for PepsiCo common stock after the Unaffected Price Date was between approximately $55.00 and $69.00 per share.

The public market trading price targets published by equity research analysts do not necessarily reflect current market trading prices for PBG common stock or PepsiCo common stock and these estimates are subject to uncertainties, including the future financial performance of PBG or PepsiCo, as applicable, and future financial market conditions.

Premia Paid Statistics

Perella Weinberg performed a statistical analysis of the premia paid in (i) all of the approximately 2,300 domestic public company 100% cash and 100% stock transactions that have been completed since January 1, 1999 in which the transaction value was greater than $200 million (except for the following four distressed bank acquisitions: Wachovia Corporation / Wells Fargo & Company; Merrill Lynch & Co., Inc. / Bank of America Corporation; National City Bank / PNC Bank, National Association; and Sovereign Bancorp, Inc. / Banco Santander); (ii) all of the 375 global consumer (food, staples, beverage and household products) transactions since January 1, 2000 in which the transaction value was greater than $500 million; and (iii) all unsolicited offers since January 1, 1999 in which the transaction value was greater than $500 million. These transactions were all compiled from the Capital IQ database (an independent data source). Perella Weinberg performed this analysis for the purpose of assisting the PBG Special Committee and the PBG Board in understanding how the implied premium in this merger compared to the premia paid in a broad spectrum of historical acquisition transactions. None of these historical transactions was necessarily directly comparable to this merger. Perella Weinberg utilized this wide range of transaction selection criteria in order to provide a meaningful statistical sample of relative valuation benchmarks (capturing, among other things, a diverse set of industries, capital market conditions and transaction types) against which to compare the implied premium to be paid in the PBG transaction. Perella Weinberg analyzed the premia based on the consideration paid in the relevant transaction relative to the closing price of the target’s common stock one week prior to the announcement of the relevant transaction. Perella Weinberg calculated the following median premia for various subsets of this data:

 

Data Subset		Median Premium
Domestic public company transactions, greater than $200 million, 100% cash, from January 1, 1999 to August 31, 2008		25.0	%
Domestic public company transactions, greater than $200 million, 100% stock, from January 1, 1999 to August 31, 2008		26.3	%

 

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Data Subset		Median Premium
Domestic public company transactions, greater than $200 million, 100% cash, from September 1, 2008 to August 2, 2009		30.3	%
Domestic public company transactions, greater than $200 million, 100% stock, from September 1, 2008 to August 2, 2009		26.1	%
Global consumer transactions, between $500 million and $3 billion, from January 1, 2000 to August 2, 2009		17.7	%
Global consumer transactions, between $3 billion and $5 billion, from January 1, 2000 to August 2, 2009		30.7	%
Global consumer transactions, greater than $5 billion, from January 1, 2000 to August 2, 2009		15.8	%
Initial offers in unsolicited offers, greater than $500 million, from January 1, 1999 to August 2, 2009		17.8	%
Final offers in unsolicited offers, greater than $500 million, from January 1, 1999 to August 2, 2009		30.9	%

Perella Weinberg considered such median premia and in light of its experience working with corporations on various merger and acquisition transactions selected a representative range of implied premia of 20-40%, which was derived based on banded distribution around the median premia discussed above. Perella Weinberg then applied this range of premia to the price of PBG common stock of $25.20 as of the Unaffected Price Date, which implied a range for PBG common stock of approximately $30.00 to $35.00 per share.

Precedent Transactions Analysis

Perella Weinberg analyzed certain information relating to selected public carbonated beverage bottling transactions from January 1, 1999 to August 3, 2009 in which the transaction value was greater than $500 million and which, in the exercise of its professional judgment and based upon its knowledge of the bottling industry, Perella Weinberg determined to be relevant public companies with business lines comparable to PBG. PBG also provided Perella Weinberg with information relating to a composite of 12 private bottling acquisitions that it had completed since 2000 that PBG management believed were comparable to the proposed acquisition of PBG by PepsiCo due to the similarities in the bottling businesses acquired. Perella Weinberg reviewed and analyzed a composite of the statistics for these transactions as well. The above-mentioned selection criteria were consistently applied and Perella Weinberg did not exclude any transactions that fit these criteria. The transactions analyzed were the following:

 

Date		Target		Acquiror		EV/LTM EBITDA
1999		Dr Pepper Bottling Company of Texas		American Bottling Company		8.1x
2000		PepsiAmericas, Inc.		Whitman Corporation		12.1x
2001		Hondo Incorporated and Herbco Enterprises, Inc.		Coca-Cola Enterprises Inc.		11.4x
2002		Pepsi-Gemex, S.A. de C.V.		The Pepsi Bottling Group, Inc.		6.2x
2002		Panamerican Beverages Inc.		Coca-Cola FEMSA, S.A. de C.V.		8.5x
2006		Dr Pepper/Seven Up, Inc.		Cadbury Schweppes plc		7.1x
2007		Coca-Cola Korea Bottling Co Ltd (CK)		LG Household and Health Care Ltd.		9.4x
		Composite of PBG Private Bottling Acquisitions (median)				8.3x

 

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The following transactions were included in the composite of PBG Private Bottling Acquisitions:

 

Date		Target		Acquiror		EV/LTM EBITDA
2001		Pepsi-Cola Elmira Bottling Co., Inc. (Elmira, NY)		The Pepsi Bottling Group, Inc.		6.5x
2001		Nor-Cal Beverage Company, Inc. (Northern California)		The Pepsi Bottling Group, Inc.		8.3x
2002		Pepsi-Cola Bottling Co. of Macon (Macon, GA)		The Pepsi Bottling Group, Inc.		8.2x
2002		Pepsi-Cola Bottling Co. of Aroostook, Inc. (Presque Isle, ME)		The Pepsi Bottling Group, Inc.		9.7x
2003		Pepsi-Cola Buffalo Bottling Corp. (Buffalo, NY)		The Pepsi Bottling Group, Inc.		7.4x
2003		Olean Bottling Works, Inc. (Olean, NY)		The Pepsi Bottling Group, Inc.		5.7x
2004		Seltzer & Rydholm, Inc. (Auburn, ME)		The Pepsi Bottling Group, Inc.		9.3x
2005		Pepsi-Cola Bottling Company of Charlotte, Inc. (Charlotte, NC)		The Pepsi Bottling Group, Inc.		16.6x
2008		Pepsi-Cola Batavia Bottling Corporation (Batavia, NY)		The Pepsi Bottling Group, Inc.		8.8x
2008		Lane Affiliated Companies, Inc.		The Pepsi Bottling Group, Inc.		14.2x
2009		Better Beverages, Ltd. (Hallettsville, TX)		The Pepsi Bottling Group, Inc.		6.4x
2009		Pepsi-Cola Bottlers for the Merrimack Valley, Inc. (Merrimack Valley, MA)		The Pepsi Bottling Group, Inc.		7.2x

For each of the selected transactions and the merger, Perella Weinberg calculated and compared the resulting enterprise value in the transaction as a multiple of LTM EBITDA. The EV/LTM EBITDA multiples for the non-PBG transactions in the table above were based on publicly available information at the time of the relevant transaction and the multiples for the private bottling acquisitions involving PBG were provided by management of PBG. Multiples for the merger were based on publicly available information and Management Base Case and were calculated using the number of fully diluted shares of PBG common stock.

The results of this analysis are summarized in the following table:

 

		EV/LTM EBITDA
Selected Transactions
Range		6.2x – 12.1x
Pepsi Bottling Group at Merger Consideration		8.3x

Based on the multiples calculated above and Perella Weinberg’s analyses of the various selected transactions and on judgments made by it, Perella Weinberg used its experience working with corporations on various merger and acquisition transactions to select a representative range of multiples of the transactions and applied that range of multiples to LTM EBITDA of PBG based on Management Base Case. Perella Weinberg selected this range in order to derive an illustrative precedent transaction-based market valuation of PBG. This multiple range was derived based on banded distribution around the observed historical multiples of the precedent transactions. Perella Weinberg then derived a range of implied equity value per share of PBG common stock of approximately $27.00 to $42.00 by applying multiples ranging from 7.0 to 9.0x to PBG’s LTM EBITDA.

Perella Weinberg noted that although the PAS merger was not included in the selected transactions analysis, it had recently been made aware of the terms thereof, including a purchase price of $28.50 per share.

Although the selected transactions were used for comparison purposes, none of the selected transactions nor the companies involved in them was either identical or directly comparable to the merger, PBG or PepsiCo. Accordingly, Perella Weinberg’s comparison of the selected transactions to the merger and analysis of the results of such comparisons was not purely mathematical, but instead necessarily involved complex considerations and

 

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judgments concerning differences in financial and operating characteristics and other factors that could affect the relative values of the companies involved in such transactions and of the merger and was based on Perella Weinberg’s experience working with corporations on various merger and acquisition transactions.

Selected Companies Analysis

Perella Weinberg reviewed and compared certain financial information for PBG to corresponding financial information, ratios and public market multiples for the following publicly traded companies in the bottling industry which, in the exercise of its professional judgment and based upon its knowledge of the bottling industry, Perella Weinberg determined to be the most relevant public companies with business lines comparable to PBG:

 

•

Coca-Cola Enterprises Inc.

 

•

PepsiAmericas, Inc.

 

•

A composite of International Bottlers (including Coca-Cola FEMSA, S.A. de C.V., Coca-Cola Hellenic Bottling Company S.A., Embotelladoras Arca, S.A.B. de C.V. and Britvic plc)

Perella Weinberg calculated and compared financial information and various financial market multiples and ratios of selected companies based on the closing price per share as of both the Unaffected Price Date and July 31, 2009, information Perella Weinberg obtained from SEC filings and Factset for historical information and consensus third party research analyst estimates compiled by the Institutional Brokers’ Estimate System (referred to herein as IBES) for forecasted information. For PBG, Perella Weinberg made calculations based on the closing price per share of PBG common stock on July 31, 2009 and utilized Street Projections, Management Base Case and Management Upside Case.

The following table provides the enterprise value as of July 31, 2009 (other than with respect to PBG (Unaffected) and PepsiAmericas, Inc. which are both as of April 17, 2009), the estimated 2010 EBITDA and estimated 2010 EPS for PBG and each of the selected companies:

 

Company		Enterprise Value (MM)			2010 Estimated EBITDA (MM)			2010 Estimated EPS
Coca-Cola Enterprises Inc.		$	17,734.2		$	2,712.9		$	1.67
PepsiAmericas, Inc.		$	4,929.7		$	731.0		$	2.08
International Bottlers Composite
Coca-Cola FEMSA, S.A. de C.V.		$	9,288.9		$	1,476.9		$	0.37
Coca-Cola Hellenic Bottling Company S.A.		$	11,364.2		$	1,510.4		$	1.66
Embotelladoras Arca, S.A.B. de C.V.		$	2,091.9		$	406.3		$	0.27
Britvic plc		$	2,047.3		$	275.0		$	0.54
PBG (@ $36.50)		$	14,813.2		$	1,931.3		$	2.61
PBG (Unaffected)		$	12,060.5		$	1,931.3		$	2.61

With respect to PBG and each of the selected companies, Perella Weinberg reviewed, among other things:

 

•

enterprise value as a multiple of estimated EBITDA for fiscal year 2010; and

 

•

price per share as a multiple of estimated EPS for fiscal year 2010.

Such multiples are summarized in the following table:

 

Company		EV/2010E EBITDA		Price/2010E EPS
Coca-Cola Enterprises Inc.		6.5x		11.3x
PepsiAmericas, Inc.		6.7x		9.6x
International Bottlers Composite		6.9x		8.0x
PBG (@$36.50)		7.7x		14.0x
PBG (Unaffected)		6.2x		9.6x

 

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Perella Weinberg also reviewed the historical 3-month, 6-month, 12-month, 2-year and 3-year EV/NTM EBITDA and price/NTM EPS averages for Coca-Cola Enterprises Inc., PepsiAmericas, Inc. and PBG. Such multiples are summarized in the following table:

 

		Coca-Cola Enterprises Inc.		PepsiAmericas, Inc.		PBG
EV/NTM EBITDA
3-month average		6.0x		6.5x		6.1x
6-month average		5.9x		6.4x		6.0x
12-month average		6.4x		6.7x		6.3x
2-year average		7.2x		7.5x		6.8x
3-year average		7.4x		7.4x		7.0x
Price/NTM EPS
3-month average		10.2x		9.4x		9.3x
6-month average		9.3x		9.2x		9.0x
12-month average		10.8x		10.3x		10.6x
2-year average		13.9x		13.5x		13.4x
3-year average		14.4x		14.0x		14.3x

Based on the analysis of the observed ratios for each of the selected companies and based on its experience working with corporations on various merger and acquisition transactions, Perella Weinberg selected representative ranges of enterprise value as a multiple of estimated EBITDA for fiscal year 2010 and price per share as a multiple of estimated EPS for fiscal year 2010 of the selected companies of 6.0x to 7.0x and 10.0x to 12.0x, respectively, in order to derive an illustrative comparable company-based market valuation of PBG. These multiple ranges were derived based on banded distribution around the observed comparable multiples of the selected companies described above. By applying these ranges of multiples to the relevant PBG statistic, this analysis implied a range for PBG common stock of approximately $23.00 to $31.00 based on Street Projections, approximately $21.00 to $32.00 based on Management Base Case and approximately $23.00 to $33.00 based on Management Upside Case.

Perella Weinberg also reviewed and compared certain financial information for PepsiCo to corresponding financial information, ratios and public market multiples for the following publicly traded companies in PepsiCo’s beverage peer group and food & beverage peer group deemed by Perella Weinberg to be relevant to its analysis:

Beverage Peer Group:

 

•

The Coca-Cola Company

 

•

Hansen Natural Corporation

 

•

Dr Pepper Snapple Group, Inc.

Beverage & Food Peer Group:

 

•

Groupe Danone

 

•

Kellogg Company

 

•

General Mills, Inc.

 

•

H.J. Heinz Company

 

•

Nestle S.A.

 

•

Kraft Foods Inc.

Perella Weinberg calculated and compared price per share as a multiple of estimated EPS for fiscal year 2010 of selected companies based on the closing price per share as of July 31, 2009, information Perella

 

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Weinberg obtained from SEC filings and Factset for historical information and consensus third party research analyst estimates compiled by IBES for forecasted information. For PepsiCo, Perella Weinberg made calculations based on the closing price per share of PBG common stock on July 31, 2009 and utilized Street Projections.

Such multiples are summarized in the following table:

 

Company		Price/2010E EPS
The Coca-Cola Company		15.0x
Hansen Natural Corporation		12.2x
Dr Pepper Snapple Group, Inc.		12.9x
Group Danone		10.1x
Kellogg Company		13.8x
General Mills, Inc.		13.2x
H.J. Heinz Company		13.8x
Nestle S.A.		14.8x
Kraft Foods, Inc.		13.6x
PepsiCo		13.9x

Perella Weinberg also reviewed the historical 3-month, 6-month, 12-month, 2-year and 3-year EV/NTM EBITDA and price/NTM EPS averages for PepsiCo, the Beverage Peer Group and the Beverage & Food Peer Group. Such multiples are summarized in the following table:

 

		PepsiCo		Beverage Peer Group		Beverage & Food Peer Group
EV/NTM EBITDA
3-month average		9.3x		9.1x		8.9x
6-month average		9.0x		8.8x		8.7x
12-month average		9.5x		9.3x		8.7x
2-year average		10.7x		9.8x		10.5x
3-year average		11.2x		10.2x		11.3x
Price/NTM EPS
3-month average		13.9x		13.4x		13.8x
6-month average		13.6x		12.9x		13.5x
12-month average		14.4x		13.9x		13.3x
2-year average		16.6x		15.4x		16.2x
3-year average		17.5x		16.3x		17.6x

Based on the analysis of the observed ratios for each of the selected companies and based on its experience working with corporations on various merger and acquisition transactions, Perella Weinberg selected a representative range of price per share as a multiple of estimated EPS for fiscal year 2010 of the selected companies of 14.0x to 17.0x in order to derive an illustrative comparable company-based market valuation of PepsiCo. These multiple ranges were derived based on banded distribution around the observed comparable multiples of the selected companies described above. By applying this range of multiples to the PepsiCo statistic this analysis implied a range for PepsiCo common stock of approximately $57.00 to $69.00.

Although selected companies were used for comparison purposes, no business of any selected company was either identical or directly comparable to PBG’s business or PepsiCo’s business, as applicable. Accordingly, Perella Weinberg’s comparison of selected companies to PBG or PepsiCo, as applicable, and analysis of the results of such comparisons was not purely mathematical, but instead necessarily involved complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the relative values of the selected companies and us and was based on Perella Weinberg’s experience working with corporations on various merger and acquisition transactions.

 

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Discounted Cash Flow Analysis

Perella Weinberg performed an illustrative discounted cash flow analysis to calculate the estimated present value as of June 30, 2009 of the estimated standalone unlevered free cash flows, calculated as EBITDA less taxes, capital expenditures and increase in working capital and subject to other adjustments, that PBG could generate during fiscal years 2009 through 2013. Estimates of unlevered free cash flows used for this analysis were based on Street Projections, Management Base Case and Management Upside Case. For each case, Perella Weinberg used discount rates ranging from 7.0% to 8.0% based on estimates of the weighted average cost of capital of PBG, calculated present values of unlevered free cash flows generated over the period described above and then added terminal values assuming terminal year multiples ranging from 6.0x to 7.0x EBITDA. Perella Weinberg chose the 7.0% to 8.0% discount rate range based on the weighted average cost of capital for publicly traded companies in the bottling industry deemed by Perella Weinberg to be relevant to its analysis (based on its experience working with corporations on various merger and acquisition transactions), adjusted for capital structure considerations. For purposes of these analyses, Perella Weinberg utilized the fully diluted number of shares of PBG common stock. These analyses indicated reference ranges of implied equity values per share of PBG common stock of approximately $28.00 to $37.00 based on Street Projections, approximately $28.00 to $37.00 based on Management Base Case and approximately $36.00 to $46.00 based on Management Upside Case.

Perella Weinberg also performed an illustrative discounted cash flow analysis to calculate the estimated present value as of June 30, 2009 of the estimated standalone unlevered free cash flows, calculated as EBITDA less taxes, capital expenditures and increase in working capital and subject to other adjustments, that PepsiCo could generate during fiscal years 2009 through 2013. Estimates of unlevered free cash flows used for this analysis were based on Street Projections. Perella Weinberg used discount rates ranging from 6.5% to 7.5% based on estimates of the weighted average cost of capital of PepsiCo, calculated present values of unlevered free cash flows generated over the period described above and then added terminal values assuming terminal year multiples ranging from 8.0x to 9.0x EBITDA. Perella Weinberg chose the 6.5% to 7.5% discount rate range based on the weighted average cost of capital for PepsiCo’s beverage peer group and food & beverage peer group deemed by Perella Weinberg to be relevant to its analysis (based on its experience working with corporations on various merger and acquisition transactions), adjusted for capital structure considerations. For purposes of these analyses, Perella Weinberg utilized the fully diluted number of shares of PepsiCo common stock. This analysis indicated a reference range of implied equity values per share of PepsiCo common stock of approximately $61.00 to $69.00.

Present Value of Future Share Price

Perella Weinberg performed an illustrative analysis of the implied present value of the future theoretical value of the shares of PepsiCo common stock to be received in the merger. This analysis is designed to provide an indication of the present value to PBG’s stockholders of a theoretical future value of PepsiCo’s equity following the merger as a function of PepsiCo’s estimated future earnings and its assumed price to future earnings per share multiple. For this analysis, Perella Weinberg used the Street Projections for calendar year 2011. Perella Weinberg first calculated the implied values for the shares of PepsiCo common stock to be received in the merger for calendar year 2011 by applying price to estimated EPS multiples of 14.0x to 17.0x (which range Perella Weinberg selected based on the 2011 trading multiples for the companies in PepsiCo’s beverage peer group and food & beverage peer group deemed by Perella Weinberg to be relevant to its analysis based on its experience working with corporations on various merger and acquisition transactions) to estimated EPS for PepsiCo following the merger for calendar year 2011 (which was $4.47). Perella Weinberg then discounted these values to June 30, 2009 using a discount rate of 7.0%. Perella Weinberg chose the 7% discount rate for PepsiCo based upon the cost of equity for PepsiCo’s beverage peer group and food & beverage peer group deemed by Perella Weinberg to be relevant to its analysis (based on its experience working with corporations on various merger and acquisition transactions), adjusted for capital structure considerations. This analysis resulted in a range of implied present value for the shares of PepsiCo common stock to be received in the merger of approximately $58.00 to $71.00. Perella Weinberg did not include the effects of a consummated PAS merger in this analysis.

 

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Synergies Analysis

Perella Weinberg calculated the value of the total synergies that might be achieved by PepsiCo in the merger and the PAS merger through 2013 on a per share of PBG common stock basis based on an assumed amount of synergies being phased in each year derived from numbers provided by PBG and PepsiCo and Street Projections. Perella Weinberg performed both a discounted cash flow valuation (in which annual synergies were analyzed using discount rates ranging from 7.0% to 8.0%, assuming a perpetual growth rate of 0% and a 37.0% tax rate) and price to EPS multiple synergies valuation (in which annual synergies were capitalized using a range of terminal price to EPS multiples of 10.0x to 12.0x, based on PBG’s 2009 unaffected price to EPS multiple, and assuming a 37.0% tax rate) on run-rate annual synergies of $200 million to $800 million and then converted the gross amount of such valuation to a per common share value based on a range of 33.3% to 66.7% of such aggregate valuation being attributable to the PBG common stock. Perella Weinberg chose the 7.0% to 8.0% discount rate range based on the weighted average cost of capital for publicly traded companies in the bottling industry deemed by Perella Weinberg to be relevant to its analysis (based on its experience working with corporations on various merger and acquisition transactions), adjusted for capital structure considerations. Perella Weinberg assumed a perpetual growth rate of 0% for the determination of the terminal value of the synergies taking into consideration, among other things, the nature of certain underlying synergies (e.g., one-time elimination of duplicative operational cost and overhead) and the implied price/EPS multiples relative to PBG’s standalone and comparable market valuation benchmarks. Based on the calculations set forth above, Perella Weinberg then applied a range of synergy valuations per share to the $36.50 merger consideration being offered in the merger resulting in an implied “standalone” price for PBG of $26.50 to $34.50.

Miscellaneous

The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth herein, without considering the analyses or the summary as a whole, could create an incomplete view of the processes underlying Perella Weinberg’s opinion. In arriving at its fairness determination, Perella Weinberg considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis. Rather, Perella Weinberg made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the analyses described herein as a comparison is directly comparable to PBG or the merger.

Perella Weinberg prepared the analyses described herein for purposes of providing its opinion to the PBG Board and the PBG Special Committee as to the fairness, from a financial point of view, of the merger consideration to be received by the holders of shares of PBG common stock, other than PepsiCo or any affiliate of PepsiCo, in the merger, on the date of Perella Weinberg’s opinion. These analyses do not purport to be appraisals or necessarily reflect the prices at which businesses or securities actually may be sold. Perella Weinberg’s analyses were based in part upon PBG’s management’s financial forecasts and estimates and third party research analyst estimates, which are not necessarily indicative of actual future results, and which may be significantly more or less favorable than suggested by Perella Weinberg’s analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties to the merger agreement or their respective advisors, none of PBG, Perella Weinberg or any other person assumes responsibility if future results are materially different from those forecasted by PBG’s management or third parties.

As described above, the opinion of Perella Weinberg to the PBG Board and the PBG Special Committee was one of many factors taken into consideration by the PBG Board and the PBG Special Committee in making their respective determinations to approve the merger. Perella Weinberg was not asked to, and did not, recommend the specific consideration payable in the merger, which consideration was determined through negotiations between PepsiCo and PBG.

Pursuant to the terms of the engagement letter between Perella Weinberg and the PBG Special Committee, PBG paid Perella Weinberg a fee of $2.5 million in connection with delivery of its opinion. In addition, PBG

 

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agreed to reimburse Perella Weinberg for its reasonable expenses, including attorneys’ fees and disbursements, and to indemnify Perella Weinberg and related persons against various liabilities, including certain liabilities under the federal securities laws.

In the ordinary course of Perella Weinberg’s business activities, Perella Weinberg or its affiliates may at any time hold long or short positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity or other securities (or related derivative securities) or financial instruments (including bank loans or other obligations) of PBG or PepsiCo or any of their respective affiliates. The issuance of Perella Weinberg’s opinion was approved by a fairness opinion committee of Perella Weinberg. During the last two years Perella Weinberg has not received any fees for investment banking or other financial services from PepsiCo.

Opinion of PepsiCo’s Financial Advisors

PepsiCo has retained Centerview Partners and BofA Merrill Lynch to act as PepsiCo’s financial advisors in connection with the merger. Centerview Partners is an investment banking firm whose principals and other professionals have substantial experience in similar transactions both while at Centerview Partners and, before that time, while having worked at other internationally recognized investment banking firms. Centerview Partners, as part of its investment banking services, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, strategic transactions, corporate restructurings, and valuations for corporate and other purposes. BofA Merrill Lynch is an internationally recognized investment banking firm which is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. PepsiCo selected Centerview Partners and BofA Merrill Lynch to act as PepsiCo’s financial advisors in connection with the merger on the basis of Centerview Partners’ and BofA Merrill Lynch’s experience in transactions similar to the merger, their reputation in the investment banking community and their familiarity with PepsiCo and its business.

On August 3, 2009, at a meeting of PepsiCo’s board of directors held to evaluate the merger, each of Centerview Partners and BofA Merrill Lynch delivered to PepsiCo’s board of directors an oral opinion, each of which was confirmed by each of Centerview Partners and BofA Merrill Lynch by delivery of a written opinion dated August 3, 2009, to the effect that, as of that date and based on and subject to various assumptions and limitations described in its written opinion, the merger consideration to be paid in the merger by PepsiCo to PBG’s stockholders other than PepsiCo and its subsidiaries was fair, from a financial point of view, to PepsiCo.

The full text of the written opinions of Centerview Partners and BofA Merrill Lynch to PepsiCo’s board of directors, which describe, among other things, the assumptions made, procedures followed, factors considered and limitations on the review undertaken, has been filed with the SEC as part of the registration statement on Form S-4 of which this proxy statement/prospectus is a part and is incorporated by reference herein and will also be made available for inspection and copying at the principal executive offices of PepsiCo during its regular business hours. The following summary of the Centerview Partners and BofA Merrill Lynch opinions is qualified in its entirety by reference to the full text of the opinions. Each of Centerview Partners and BofA Merrill Lynch delivered its opinion to PepsiCo’s board of directors for the benefit and use of PepsiCo’s board of directors in connection with and for purposes of its evaluation of the merger consideration from a financial point of view to PepsiCo.

The opinions and financial analyses of Centerview Partners and BofA Merrill Lynch do not address any other aspect of the merger (including, without limitation, the fairness or appropriateness of the merger consideration to PBG or any of its stockholders) and do not constitute recommendations to any stockholder of any party to the merger as to how to vote or act in connection with the merger. The opinions and financial analyses of Centerview Partners and BofA Merrill Lynch were prepared for and delivered to the board of directors of PepsiCo and did not evaluate the merger or the merger consideration

 

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from the point of view of any party other than PepsiCo. PepsiCo did not request, and Centerview Partners and BofA Merrill Lynch did not provide, any opinion or financial analyses to PepsiCo, PBG or PAS or to any of their stockholders as to the fairness to the holders (in such capacity) of PBG common stock or PAS common stock of the merger consideration or the merger consideration payable in the PAS merger, or any valuation of PBG or PAS for the purpose of assessing the fairness to the holders (in such capacity) of PBG common stock or PAS common stock of the merger consideration or the merger consideration payable in the PAS merger. The opinions and financial analyses of Centerview Partners and BofA Merrill Lynch were not intended to be used by PBG’s stockholders in evaluating the merger or the merger consideration.

Opinion of Centerview Partners

In connection with rendering its opinion, Centerview Partners, among other things:

 

(i)

reviewed certain publicly available business and financial information relating to PBG and PepsiCo;

 

(ii)

reviewed certain financial forecasts relating to PBG prepared by the management of PepsiCo, referred to in this proxy statement/prospectus as the PepsiCo-PBG forecasts, and discussed with the management of PepsiCo its assessments as to the relative likelihood of achieving the future financial results reflected in the PepsiCo-PBG forecasts;

 

(iii)

reviewed certain internal financial and operating information with respect to the business, operations and prospects of PepsiCo furnished to or discussed with Centerview Partners by the management of PepsiCo, including certain financial forecasts relating to PepsiCo prepared by the management of PepsiCo, referred to in this proxy statement/prospectus as the PepsiCo forecasts;

 

(iv)

reviewed certain estimates as to the amount and timing of cost savings and revenue enhancements, referred to in this proxy statement/prospectus as synergies, anticipated by the management of PepsiCo to result from the merger;

 

(v)

discussed the past and current business, operations, financial condition and prospects of PBG with members of senior managements of PBG and PepsiCo, and discussed the past and current business, operations, financial condition and prospects of PepsiCo, including after giving effect to the merger, and the strategic benefits anticipated by the management of PepsiCo to result therefrom, with members of senior management of PepsiCo;

 

(vi)

reviewed the potential pro forma financial impact of the merger on the future financial performance of PepsiCo, including the potential effect on PepsiCo’s estimated earnings per share;

 

(vii)

reviewed the trading histories for PBG common stock and PepsiCo common stock and a comparison of such trading histories with each other and with the trading histories of other companies Centerview Partners deemed relevant;

 

(viii)

compared certain financial and stock market information of PBG and PepsiCo with similar information of other companies Centerview Partners deemed relevant;

 

(ix)

compared certain financial terms of the merger to financial terms, to the extent publicly available, of other transactions Centerview Partners deemed relevant;

 

(x)

reviewed a draft, dated August 3, 2009, of the merger agreement; and

 

(xi)

performed such other analyses and studies and considered such other information and factors as Centerview Partners deemed appropriate.

In arriving at its opinion, Centerview Partners assumed and relied upon, without independent verification, the accuracy and completeness of the financial and other information and data publicly available or provided to or otherwise reviewed by or discussed with it and relied upon the assurances of the management of PepsiCo that it was not aware of any facts or circumstances that would make such information or data inaccurate or misleading in any material respect. With respect to the PepsiCo-PBG forecasts, the PepsiCo forecasts and the synergies,

 

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Centerview Partners assumed, at the direction of PepsiCo, that they were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the management of PepsiCo as to the future financial performance of PBG and PepsiCo and the other matters covered thereby and, based on the assessments of the management of PepsiCo as to the relative likelihood of achieving the future financial results reflected in the PepsiCo-PBG forecasts, Centerview Partners relied, at the direction of PepsiCo, on the PepsiCo-PBG forecasts for purposes of its opinion (it being understood that while Centerview Partners was provided by PepsiCo with certain confirmatory internal financial information with respect to PBG provided to PepsiCo by PBG, Centerview Partners was not provided with comprehensive financial forecasts for PBG prepared by PBG). Centerview Partners relied, at the direction of PepsiCo, on the assessments of the management of PepsiCo as to PepsiCo’s ability to achieve the synergies and was advised by PepsiCo, and assumed, that the synergies would be realized in the amounts and at the times projected in all respects material to its analysis. Centerview Partners did not make and was not provided with any independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of PBG or PepsiCo, nor did it make any physical inspection of the properties or assets of PBG or PepsiCo. Centerview Partners did not evaluate the solvency or fair value of PBG or PepsiCo under any state, federal or other laws relating to bankruptcy, insolvency or similar matters. Centerview Partners assumed, at the direction of PepsiCo, that the merger would be consummated in accordance with its terms, without waiver, modification or amendment of any material term, condition or agreement and that, in the course of obtaining the necessary governmental, regulatory and other approvals, consents, releases and waivers for the merger, no delay, limitation, restriction or condition, including any divestiture requirements or amendments or modifications, would be imposed that would have an adverse effect on PBG, PepsiCo or the contemplated benefits of the merger material to its analysis. Centerview Partners is not a legal, tax, regulatory or accounting advisor and relied upon PepsiCo and its legal, tax, regulatory and accounting advisors to make their own assessment of all legal, tax, regulatory and accounting matters relating to the merger. Centerview Partners assumed, at the direction of PepsiCo, that the merger would qualify for federal income tax purposes as a reorganization under the provisions of Section 368(a) of the Code. Centerview Partners also assumed, at the direction of PepsiCo, that the final executed merger agreement would not differ in any material respect from the draft dated August 3, 2009 of the merger agreement reviewed by it.

Centerview Partners expressed no view or opinion as to any terms or other aspects of the merger (other than the merger consideration to the extent expressly specified in its opinion), including, without limitation, the form or structure of the merger. Centerview Partners’ opinion was limited to the fairness, from a financial point of view, to PepsiCo of the merger consideration to be paid in the merger and no opinion or view was expressed with respect to any consideration received in connection with the merger by the holders of any class of securities, creditors or other constituencies of any party. In addition, no opinion or view was expressed with respect to the fairness (financial or otherwise) of the amount, nature or any other aspect of any compensation to any of the officers, directors or employees of any party to the merger, or class of such persons, relative to the merger consideration. Furthermore, no opinion or view was expressed as to the relative merits of the merger in comparison to other strategies or transactions that might be available to PepsiCo or in which PepsiCo might engage or as to the underlying business decision of PepsiCo to proceed with or effect the merger. Centerview Partners did not express any opinion as to what the value of PepsiCo common stock actually would be when issued or the prices at which PepsiCo common stock or PBG common stock would trade at any time, including following announcement or consummation of the merger. In addition, Centerview Partners expressed no opinion or recommendation as to how any stockholder of any party to the merger should vote or act in connection with the merger or any related matter.

Centerview Partners’ opinion was necessarily based on financial, economic, monetary, market and other conditions and circumstances as in effect on, and the information made available to Centerview Partners as of, the date of its opinion. It should be understood that subsequent developments may affect its opinion, and Centerview Partners does not have any obligation to update, revise or reaffirm its opinion. The issuance of Centerview Partners’ opinion was approved by Centerview Partners’ fairness opinion committee.

 

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Opinion of BofA Merrill Lynch

In connection with rendering its opinion, BofA Merrill Lynch, among other things:

 

(i)

reviewed certain publicly available business and financial information relating to PBG and PepsiCo;

 

(ii)

reviewed the PepsiCo-PBG forecasts and discussed with the management of PepsiCo its assessments as to the relative likelihood of achieving the future financial results reflected in the PepsiCo-PBG forecasts;

 

(iii)

reviewed certain internal financial and operating information with respect to the business, operations and prospects of PepsiCo furnished to or discussed with BofA Merrill Lynch by the management of PepsiCo, including the PepsiCo forecasts;

 

(iv)

reviewed the synergies anticipated by the management of PepsiCo to result from the merger;

 

(v)

discussed the past and current business, operations, financial condition and prospects of PBG with members of senior managements of PBG and PepsiCo, and discussed the past and current business, operations, financial condition and prospects of PepsiCo, including after giving effect to the merger, and the strategic benefits anticipated by the management of PepsiCo to result therefrom, with members of senior management of PepsiCo;

 

(vi)

reviewed the potential pro forma financial impact of the merger on the future financial performance of PepsiCo, including the potential effect on PepsiCo’s estimated earnings per share;

 

(vii)

reviewed the trading histories for PBG common stock and PepsiCo common stock and a comparison of such trading histories with each other and with the trading histories of other companies BofA Merrill Lynch deemed relevant;

 

(viii)

compared certain financial and stock market information of PBG and PepsiCo with similar information of other companies BofA Merrill Lynch deemed relevant;

 

(ix)

compared certain financial terms of the merger to financial terms, to the extent publicly available, of other transactions BofA Merrill Lynch deemed relevant;

 

(x)

reviewed a draft, dated August 3, 2009, of the merger agreement; and

 

(xi)

performed such other analyses and studies and considered such other information and factors as BofA Merrill Lynch deemed appropriate.

In arriving at its opinion, BofA Merrill Lynch assumed and relied upon, without independent verification, the accuracy and completeness of the financial and other information and data publicly available or provided to or otherwise reviewed by or discussed with it and relied upon the assurances of the management of PepsiCo that it was not aware of any facts or circumstances that would make such information or data inaccurate or misleading in any material respect. With respect to the PepsiCo-PBG forecasts, the PepsiCo forecasts and the synergies, BofA Merrill Lynch assumed, at the direction of PepsiCo, that they were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the management of PepsiCo as to the future financial performance of PBG and PepsiCo and the other matters covered thereby and, based on the assessments of the management of PepsiCo as to the relative likelihood of achieving the future financial results reflected in the PepsiCo-PBG forecasts, BofA Merrill Lynch relied, at the direction of PepsiCo, on the PepsiCo-PBG forecasts for purposes of its opinion (it being understood that while BofA Merrill Lynch was provided by PepsiCo with certain confirmatory internal financial information with respect to PBG provided to PepsiCo by PBG, BofA Merrill Lynch was not provided with comprehensive financial forecasts for PBG prepared by PBG). BofA Merrill Lynch relied, at the direction of PepsiCo, on the assessments of the management of PepsiCo as to PepsiCo’s ability to achieve the synergies and was advised by PepsiCo, and assumed, that the synergies would be realized in the amounts and at the times projected in all respects material to its analysis. BofA Merrill Lynch did not make and was not provided with any independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of PBG or PepsiCo, nor did it make any physical inspection of the properties or assets

 

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of PBG or PepsiCo. BofA Merrill Lynch did not evaluate the solvency or fair value of PBG or PepsiCo under any state, federal or other laws relating to bankruptcy, insolvency or similar matters. BofA Merrill Lynch assumed, at the direction of PepsiCo, that the merger would be consummated in accordance with its terms, without waiver, modification or amendment of any material term, condition or agreement and that, in the course of obtaining the necessary governmental, regulatory and other approvals, consents, releases and waivers for the merger, no delay, limitation, restriction or condition, including any divestiture requirements or amendments or modifications, would be imposed that would have an adverse effect on PBG, PepsiCo or the contemplated benefits of the merger material to its analysis. BofA Merrill Lynch is not a legal, tax, regulatory or accounting advisor and relied upon PepsiCo and its legal, tax, regulatory and accounting advisors to make their own assessment of all legal, tax, regulatory and accounting matters relating to the merger. BofA Merrill Lynch assumed, at the direction of PepsiCo, that the merger would qualify for federal income tax purposes as a reorganization under the provisions of Section 368(a) of the Code. BofA Merrill Lynch also assumed, at the direction of PepsiCo, that the final executed merger agreement would not differ in any material respect from the draft dated August 3, 2009 of the merger agreement reviewed by it.

BofA Merrill Lynch expressed no view or opinion as to any terms or other aspects of the merger (other than the merger consideration to the extent expressly specified in its opinion), including, without limitation, the form or structure of the merger. BofA Merrill Lynch’s opinion was limited to the fairness, from a financial point of view, to PepsiCo of the merger consideration to be paid in the merger and no opinion or view was expressed with respect to any consideration received in connection with the merger by the holders of any class of securities, creditors or other constituencies of any party. In addition, no opinion or view was expressed with respect to the fairness (financial or otherwise) of the amount, nature or any other aspect of any compensation to any of the officers, directors or employees of any party to the merger, or class of such persons, relative to the merger consideration. Furthermore, no opinion or view was expressed as to the relative merits of the merger in comparison to other strategies or transactions that might be available to PepsiCo or in which PepsiCo might engage or as to the underlying business decision of PepsiCo to proceed with or effect the merger. BofA Merrill Lynch did not express any opinion as to what the value of PepsiCo common stock actually would be when issued or the prices at which PepsiCo common stock or PBG common stock would trade at any time, including following announcement or consummation of the merger. In addition, BofA Merrill Lynch expressed no opinion or recommendation as to how any stockholder of any party to the merger should vote or act in connection with the merger or any related matter.

BofA Merrill Lynch’s opinion was necessarily based on financial, economic, monetary, market and other conditions and circumstances as in effect on, and the information made available to BofA Merrill Lynch as of, the date of its opinion. It should be understood that subsequent developments may affect its opinion, and BofA Merrill Lynch does not have any obligation to update, revise or reaffirm its opinion. The issuance of BofA Merrill Lynch’s opinion was approved by BofA Merrill Lynch’s Americas Fairness Opinion (and Valuation Letter) Committee.

Joint Financial Analyses of Centerview Partners and BofA Merrill Lynch

The following represents a brief summary of the material financial analyses presented by Centerview Partners and BofA Merrill Lynch to PepsiCo’s board of directors in connection with their respective opinions described above and contained in the presentation that was delivered to PepsiCo’s board of directors on August 3, 2009. The opinions and financial analyses of Centerview Partners and BofA Merrill Lynch do not address any other aspect of the merger (including, without limitation, the fairness or appropriateness of the merger consideration to PBG or any of its stockholders) and do not constitute recommendations to any stockholder of any party to the merger as to how to vote or act in connection with the merger. The opinions and financial analyses of Centerview Partners and BofA Merrill Lynch were prepared for and delivered to the board of directors of PepsiCo and did not evaluate the merger or the merger consideration from the point of view of any party other than PepsiCo. PepsiCo did not request, and Centerview Partners and BofA Merrill Lynch did not provide, any opinion or financial analyses to PepsiCo, PBG or PAS or to any of their stockholders as to the fairness to the holders (in such capacity) of PBG common stock or PAS common stock of the merger

 

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consideration or the merger consideration payable in the PAS merger, or any valuation of PBG or PAS for the purpose of assessing the fairness to the holders (in such capacity) of PBG common stock or PAS common stock of the merger consideration or the merger consideration payable in the PAS merger. The opinions and financial analyses of Centerview Partners and BofA Merrill Lynch were not intended to be used by PBG’s stockholders in evaluating the merger or the merger consideration. The following summary is included here only for informational purposes and to comply with applicable disclosure requirements. The summary of the presentation set forth below is qualified in its entirety by reference to the full text of the presentation materials, which have been filed with the SEC as part of the registration statement on Form S-4 of which this proxy statement/prospectus is a part. The financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses performed by Centerview Partners and BofA Merrill Lynch, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses performed by Centerview Partners and BofA Merrill Lynch. Considering the data set forth in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by Centerview Partners and BofA Merrill Lynch.

In connection with the PBG merger, each of Centerview Partners and BofA Merrill Lynch also delivered to PepsiCo’s board of directors an opinion with respect to the merger consideration of either 0.6432 of a share of PepsiCo common stock or $36.50 in cash, without interest, payable in the PBG merger in respect of each share of PBG common stock held by PBG stockholders (other than for the shares held by PBG (as treasury stock), by PepsiCo or any of its subsidiaries, or by stockholders who have properly exercised and perfected appraisal rights under Delaware law with respect to their shares), subject to proration procedures intended to provide for a 50% cash/50% stock allocation of the aggregate merger consideration payable in the PBG merger, such merger consideration referred to in this proxy statement/prospectus as the PBG merger consideration, similar to their respective opinions described in this proxy statement/prospectus. The full text of those written opinions describe, among other things, the assumptions made, procedures followed, factors considered and limitations on the review undertaken which are similar to those described in this proxy statement/prospectus with respect to the opinions delivered to PepsiCo’s board of directors in connection with the merger. Financial analyses of PAS prepared by Centerview Partners and BofA Merrill Lynch were also presented by Centerview Partners and BofA Merrill Lynch to PepsiCo’s board of directors in connection with their respective opinions with respect to the PAS merger consideration and are described in the Registration Statement on Form S-4 filed by PepsiCo concurrently with the filing of this proxy statement/prospectus in connection with the PAS merger. These financial analyses are similar to the financial analyses performed with respect to the merger consideration, as described below, and the methodologies and assumptions underlying these financial analyses are similar to those described below with respect to the financial analyses of the merger consideration.

Financial Analyses

Historical Stock Trading and Equity Analyst Price Target Analyses. Centerview Partners and BofA Merrill Lynch compared the $25.20 “unaffected” per share closing price of PBG on April 17, 2009, the last day of trading prior to PepsiCo’s initial public announcement of a proposal to acquire PBG, and the merger consideration of $36.50 as of August 3, 2009 to the 52-week trading range for PBG for the period ended April 17, 2009 and selected analyst price targets found in publicly available equity research both pre-announcement on April 17, 2009 and as of July 31, 2009. The trading range for the 52-week period ended April 17, 2009 for PBG was $15.78 to $35.10, the pre-announcement analyst price targets for PBG, which excluded one price target as an outlier, ranged from $20.00 to $31.00, and the analyst price targets as of July 31, 2009, which excluded one price target because it was based solely on PBG fundamentals, ranged from $33.00 to $39.00, as compared to the $25.20 “unaffected” per share closing price of PBG on April 17, 2009 and the merger consideration of $36.50 as of August 3, 2009.

 

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Selected Publicly Traded Companies Analysis. Centerview Partners and BofA Merrill Lynch reviewed publicly available financial and stock market information for PBG and PAS, on an unaffected basis, and the following two companies which are the only two publicly traded companies in the United States beverage sector with significant bottling operations and enterprise values of greater than $500 million:

 

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Coca-Cola Enterprises Inc.

 

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Dr Pepper Snapple Group, Inc.

Centerview Partners and BofA Merrill Lynch reviewed, among other things, enterprise values of the four selected publicly traded companies, calculated as equity values based on fully diluted shares outstanding using the treasury method multiplied by the closing stock prices on July 31, 2009 (except that PBG and PAS equity values were calculated as of April 17, 2009, the last day of trading prior to PepsiCo’s initial public announcements of proposals to acquire PBG and PAS), plus preferred equity at liquidation value (including redeemable preferred equity), debt and minority interest, less cash and marketable securities, as a multiple of calendar year 2009 estimated earnings before interest, taxes, depreciation and amortization, commonly referred to as EBITDA. The enterprise values reviewed for each of Coca-Cola Enterprises Inc., Dr Pepper Snapple Group, Inc., PAS and PBG were $17,734 million, $9,465 million, $4,987 million and $11,793 million, respectively. The calendar year 2009 estimated EBITDA reviewed for each of Coca-Cola Enterprises Inc., Dr Pepper Snapple Group, Inc., PAS and PBG were $2,575 million, $1,158 million, $699 million and $1,796 million, respectively. Estimated financial data of the selected publicly traded companies were based on publicly available consensus research analysts’ estimates. The analysis indicated an enterprise value to calendar year 2009 estimated EBITDA multiple for such companies ranging from a low of 6.7x to a high of 8.2x. Centerview Partners and BofA Merrill Lynch then applied a reference range (7.0x-8.0x) of multiples of enterprise value to calendar year 2009 estimated EBITDA derived from the selected publicly traded companies to corresponding estimated EBITDA data of PBG ($1,834 million). Estimated financial data of PBG was based on the PepsiCo-PBG forecasts. This analysis indicated the following implied per share equity value reference range for PBG, as compared to the merger consideration:

 

Implied Per Share Equity Value Reference Range for PBG		Merger Consideration
$28.50-$36.00		$	36.50

No company used in these analyses is identical or directly comparable to PBG. Accordingly, an evaluation of the results of these analyses is not entirely mathematical. Rather, these analyses involve complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the public trading or other values of the companies to which PBG was compared.

 

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Discounted Cash Flow Analysis. Centerview Partners and BofA Merrill Lynch performed a discounted cash flow analysis of PBG to calculate the estimated present value of the standalone unlevered, after-tax free cash flows that PBG could generate during PBG’s fiscal years 2009 through 2018 based on the PepsiCo-PBG forecasts, assuming net debt of PBG of $6,546 million and an underfunding of PBG’s pension of $679 million, per PBG’s public filings. At the instructions of PepsiCo’s management, Centerview Partners and BofA Merrill Lynch applied an assumed annual growth rate of 5.0% (based on historical free cash flow trends and PepsiCo’s management’s view of the business going forward) in calculating PBG’s annual free cash flows for 2013 through 2018. Centerview Partners and BofA Merrill Lynch calculated terminal values for PBG by using an estimated free cash flow perpetuity growth rate of 1.5% (the midpoint of the range of estimated free cash flow perpetuity growth rates of 1.0% to 2.0% which was reviewed because these rates reflect category growth rates). The cash flows and terminal values were then discounted to present value as of June 30, 2009 using discount rates ranging from 7.0% to 8.0%, which were chosen by Centerview Partners and BofA Merrill Lynch based upon an analysis of the weighted average cost of capital of PBG. This analysis is based on the weighted average cost of equity (determined through application of the capital asset pricing model) and the after-tax cost of debt. The capital asset pricing model takes into account various financial metrics including betas of comparable companies, the risk free rate, the equity risk premium, and the size premium. This analysis indicated the following implied per share equity value reference range for PBG as compared to the merger consideration:

 

Implied Per Share Equity Value Reference Range for PBG		Merger Consideration
$33.25-$44.25		$	36.50

Additionally, Centerview Partners and BofA Merrill Lynch noted that, if the portion of the approximate after-tax net present value (calculated using an illustrative 7.75% blended discount rate and 1.5% perpetuity growth rate post 2012) of expected synergies anticipated by PepsiCo’s management to be achieved in fiscal years 2010 through 2012 (assuming $300 million in pre-tax run-rate synergies, certain costs to achieve synergies (including an incremental $70 million in integration cash costs in fiscal year 2010) and other dis-synergies, per the PepsiCo-PBG forecasts, based upon pro forma ownership of PBG and PAS by PepsiCo, allocated 70% to PBG and 30% to PAS, where applicable, per PepsiCo’s management) were added to the discounted cash flow valuations of PBG common stock, the high end of implied per share equity value reference range for PBG would be increased from $44.25 per share to $52.50 per share.

 

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Selected Precedent Transactions Analysis. Centerview Partners and BofA Merrill Lynch reviewed, to the extent publicly available, financial information relating to the following eleven selected transactions involving relevant international beverage companies that are of a substantial size and for which publicly disclosed information is available. These transactions were selected because each of the targets derived a majority or a significant percentage of its revenues from bottling. Centerview Partners and BofA Merrill Lynch are not aware of any transactions meeting these criteria other than those used in their analysis.

 

Announcement Date		Acquiror		Target		Enterprise Value (in millions)			Enterprise Value/ LTM EBITDA
November 2008		Lion Nathan Ltd (offer withdrawn on February 9, 2009)		Coca Cola Amatil Ltd		$	6,094		10.9x
March 2008		PepsiCo, Inc./The Pepsi Bottling Group, Inc.		Lebedyansky JSC		$	2,062		13.4x
November 2007		PepsiCo, Inc./PepsiAmericas, Inc.		Sandora, LLC			$679		N/A
June 2007		Coca Cola Femsa, S.A.B. de C.V.		Panamco México, S.A. de C.V.		$	3,594		7.7x
April 2006		Cadbury Schweppes plc		Dr Pepper/Seven-Up Companies, Inc.		$	1,458		7.1x
October 2002		The Pepsi Bottling Group, Inc.		Pepsi-Gemex, S.A. de C.V.		$	1,252		6.3x
April 2001		Coca-Cola Enterprises Inc.		Hondo Incorporated and Herbco Enterprises, Inc.		$	1,300		10.7x
February 2001		San Miguel Corp./Coca-Cola Company		Coca-Cola Bottlers Philippines, Inc.		$	1,243		7.3x
August 2000		Whitman Corporation		PepsiAmericas, Inc.			$662		11.8x
October 1999		Coca-Cola Hellenic Bottling Company S.A.		Coca-Cola Beverages plc		$	2,145		14.5x
September 1999		Cadbury Schweppes plc/The Carlyle Group		Dr Pepper Bottling Company of Texas			$691		8.1x

Centerview Partners and BofA Merrill Lynch reviewed the enterprise value implied for the target company based on the consideration payable in the selected transactions, as a multiple of the target company’s latest twelve months EBITDA, commonly referred to as LTM EBITDA. The analysis indicated an enterprise value to LTM EBITDA multiple for such transactions ranging from a low of 6.3x to a high of 14.5x, with a mean of 9.8x and a median of 9.4x. Centerview Partners and BofA Merrill Lynch then applied a reference range (8.0x-10.0x) of selected multiples of enterprise value to LTM EBITDA derived from the selected transactions to corresponding LTM EBITDA data of PBG ($1,769 million) based on the judgment of Centerview Partners and BofA Merrill Lynch and the characteristics of each of the transactions and companies involved. The LTM financial data of the selected transactions and PBG were based on publicly available information. This analysis indicated the following implied per share equity value reference range for PBG, as compared to the merger consideration:

 

Implied Per Share Equity Value Reference Range for PBG		Merger Consideration
$33.75-$48.25		$	36.50

 

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No company, business or transaction used in these analyses is identical or directly comparable to PBG or the merger. Accordingly, an evaluation of the results of these analyses is not entirely mathematical. Rather, these analyses involve complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the acquisition or other values of the companies, business segments or transactions to which PBG and the merger were compared.

Precedent Squeezeout Premiums Analysis. Centerview Partners and BofA Merrill Lynch reviewed, to the extent publicly available, financial information relating to twenty selected transactions in which publicly traded minority interests were “squeezed out.” The review included all transactions between January 1, 2004 and the date of the opinions which were acquisitions of publicly traded minority interests in a United States company with a value of greater than $250 million with an initial acquirer ownership stake of at least forty percent which ultimately led to a public agreement or tender offer. Below is a list of the transactions:

 

Announcement Date		Acquiror		Target
April 27, 2009		Atlas America, Inc.		Atlas Energy Resources, LLC
August 12, 2008		Mitsubishi UFG Financial Group, Inc.		UnionBanCal Corporation
July 21, 2008		Roche Holding Ltd.		Genentech Inc.
March 10, 2008		Nationwide Mutual Insurance Company		Nationwide Financial Services, Inc.
October 23, 2007		Macquarie Infrastructure Partners; Goldman Sachs Group, Inc.		Waste Industries USA Inc.
July 17, 2007		Alfa Mutual Insurance Company		Alfa Insurance Corporation
January 24, 2007		American International Group, Inc.		21st Century Insurance Group
November 20, 2006		TD Bank Financial Group		TD Banknorth Inc.
October 9, 2006		VNU Group B.V.		NetRatings, Inc.
September 14, 2006		Harbinger Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund, L.P.		Applica Incorporated
February 2, 2006		Lafarge S.A.		Lafarge North America Inc.
November 22, 2005		Nestle S.A.		Dreyer’s Grand Ice Cream Holdings, Inc.
September 12, 2005		Wachovia Corporation		WFS Financial Inc
September 1, 2005		Novartis AG		Chiron Corporation
September 1, 2005		Seven-Eleven Japan Co., Ltd.		7-Eleven, Inc.
February 21, 2005		Novartis AG		Eon Labs, Inc.
January 27, 2005		Danisco A/S		Genencor International, Inc.
January 18, 2005		Liberty Media International, Inc.		UnitedGlobalCom, Inc.
January 10, 2005		News Corporation		Fox Entertainment Group, Inc.
August 2, 2004		Cox Enterprises, Inc.		Cox Communications, Inc.

Centerview Partners and BofA Merrill Lynch then analyzed the final offer premium prior to announcement based on the stated premium one day prior to announcement. That analysis indicated a minimum premium of (2.0%), a maximum premium of 138.4% and a mean premium of 28.6%. Centerview Partners and BofA Merrill Lynch then applied a reference range (25.0%-35.0%) of selected one day prior premiums paid derived from that analysis to the price of PBG common stock on April 17, 2009, the last day of trading prior to PepsiCo’s initial public announcement of a proposal to acquire PBG. This analysis indicated the following implied per share equity value reference range for PBG, as compared to the merger consideration:

 

Implied Per Share Equity Value Range for PBG		Merger Consideration
$31.50-$34.00		$	36.50

 

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No company, business or transaction used in these analyses is identical or directly comparable to PBG or the merger. Accordingly, an evaluation of the results of these analyses is not entirely mathematical. Rather, these analyses involve complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the acquisition or other values of the companies, business segments or transactions to which PBG and the merger were compared.

Pro Forma Accretion/Dilution Analysis

Centerview Partners and BofA Merrill Lynch reviewed the potential pro forma financial effect on PepsiCo’s calendar years 2010 through 2012 estimated earnings per share, commonly referred to as EPS of both (i) the merger, only, and (ii) the merger and the PAS merger, taken together. Estimated financial data of PepsiCo were based on the PepsiCo forecasts and estimated financial data of PBG and PAS were based on the PepsiCo-PBG forecasts and PepsiCo-PAS forecasts, respectively. Based on the merger consideration, this analysis indicated that the merger, only, could be dilutive to PepsiCo’s estimated EPS for calendar year 2010 and accretive to PepsiCo’s estimated EPS for calendar years 2011 through 2012. Based on the merger consideration and the PAS merger consideration, this analysis indicated that the merger and the PAS merger, taken together, could be accretive to PepsiCo’s estimated EPS for calendar years 2010 through 2012.

The analysis assumed, per PepsiCo’s management guidance, $300 million of pre-tax run-rate synergies phased in over three years and costs to achieve synergies and other dis-synergies, allocated 70% to PBG and 30% to PAS. The analysis also assumed, per PepsiCo’s management guidance, an illustrative transaction closing date of December 31, 2009, certain purchase accounting adjustments, new debt at an illustrative interest rate of 6.0% and an additional $2 billion “catch-up” share buyback in 2010 to compensate for suspended 2009 share repurchases as a result of the merger and the PAS merger.

The pro forma accretion/dilution analysis, in this context, is not a material component of evaluating the fairness of a transaction from a financial point of view. Centerview Partners and BofA Merrill Lynch performed this analysis in order to assist PepsiCo’s board of directors in assessing the impact of the transaction on the earnings per share of PepsiCo. The actual results achieved by the combined company may vary from projected results and the variations may be material.

Other Factors

In rendering their respective opinions, Centerview Partners and BofA Merrill Lynch also reviewed and considered other factors, including:

 

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historical trading prices of PepsiCo common stock and other selected publicly traded companies in the food and beverage sector during the two-year period ended July 31, 2009;

 

•

the current price of PepsiCo common stock and other selected publicly traded companies in the food and beverage sectors as a multiple of the expected earnings per share for such company for the next twelve months;

 

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the estimated enterprise value of PepsiCo and other selected publicly traded companies in the food and beverage sector as a multiple of the estimated EBITDA of such company for calendar year 2009; and

 

•

selected analyst price targets, recommendations and estimates of EPS for calendar year 2009 for PepsiCo’s common stock.

Estimated financial data was based on publicly available information. No company or business used in considering these factors is identical or directly comparable to PepsiCo.

Miscellaneous

As noted above, the discussion set forth above is a summary of the material financial analyses presented by Centerview Partners and BofA Merrill Lynch to PepsiCo’s board of directors in connection with its opinion and is not a comprehensive description of all analyses undertaken by Centerview Partners and BofA Merrill Lynch in

 

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connection with their respective opinions. The preparation of a financial opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a financial opinion is not readily susceptible to partial analysis or summary description. Centerview Partners and BofA Merrill Lynch believe that their analyses summarized above must be considered as a whole. Centerview Partners and BofA Merrill Lynch further believe that selecting portions of their analyses and the factors considered or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying Centerview Partners’ and BofA Merrill Lynch’s analyses and opinions. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that such analysis was given greater weight than any other analysis referred to in the summary.

In performing their analyses, Centerview Partners and BofA Merrill Lynch considered industry performance, general business and economic conditions and other matters, many of which are beyond the control of PepsiCo and PBG. The estimates of the future performance of PepsiCo and PBG in or underlying Centerview Partners’ and BofA Merrill Lynch’s analyses are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than those estimates or those suggested by Centerview Partners’ and BofA Merrill Lynch’s analyses. These analyses were prepared solely as part of Centerview Partners’ and BofA Merrill Lynch’s analysis of the fairness to PepsiCo, from a financial point of view, of the merger consideration to be paid in the merger by PepsiCo to PBG’s stockholders other than PepsiCo and its subsidiaries and were provided to PepsiCo’s board of directors in connection with the delivery of Centerview Partners’ and BofA Merrill Lynch’s opinions. The analyses do not purport to be appraisals or to reflect the prices at which a company might actually be sold or the prices at which any securities have traded or may trade at any time in the future. Accordingly, the estimates used in, and the ranges of valuations resulting from, any particular analysis described above are inherently subject to substantial uncertainty and should not be taken to be Centerview Partners’ or BofA Merrill Lynch’s view of the actual values of PepsiCo or PBG.

The type and amount of consideration payable in the merger was determined through negotiations between PepsiCo and PBG, rather than by any financial advisor, and was approved by PepsiCo’s board of directors. The decision to enter into the merger agreement was solely that of PepsiCo’s board of directors. As described above, Centerview Partners and BofA Merrill Lynch’s opinions and analyses were only one of many factors considered by PepsiCo’s board of directors in its evaluation of the merger and should not be viewed as determinative of the views of PepsiCo’s board of directors or management with respect to the merger or the merger consideration.

Under the terms of separate letter agreements, PepsiCo engaged each of Centerview Partners and BofA Merrill Lynch to act as its financial advisor in connection with the merger and the PAS merger. Pursuant to those letter agreements, PepsiCo has agreed to pay Centerview Partners a transaction fee of approximately $22 million, and BofA Merrill Lynch a transaction fee of approximately $14 million. A portion equal to $18.7 million and $11.9 million of the transaction fee payable to each of Centerview Partners and BofA Merrill Lynch, respectively, is payable upon consummation of both the merger and the PAS merger. PepsiCo took the existence of these contingent fees into account when considering the analysis, advice and opinions of its financial advisors. In the case of the consummation of one transaction without the other, PepsiCo has agreed to pay Centerview Partners and BofA Merrill Lynch a transaction fee to be mutually agreed. Furthermore, BofA Merrill Lynch and certain of its affiliates are participating in the financing for the merger and the PAS merger, for which services BofA Merrill Lynch and its affiliates will receive significant compensation, which currently is estimated to be approximately $15 million, including acting as (i) sole administrative agent, joint lead arranger and joint book runner for, and lender under, a $4 billion 364-day senior unsecured revolving credit facility to PepsiCo to fund the merger and the PAS merger and (ii) joint bookrunning managing underwriter, joint bookrunning managing placement agent or joint bookrunning managing initial purchaser in connection with PepsiCo’s proposed issuance of $4 billion of debt or equity securities following the merger and the PAS merger. PepsiCo also has agreed to reimburse Centerview Partners’ and BofA Merrill Lynch’s expenses and indemnify Centerview Partners and BofA Merrill Lynch against certain liabilities arising out of their respective engagements.

 

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Centerview Partners has in the past performed, and may continue to perform, investment banking services for PepsiCo and its affiliates, in each case, for customary compensation. In the ordinary course of Centerview Partners’ and its affiliates’ businesses, Centerview Partners and its affiliates may actively trade or hold the securities of any of the parties to the merger for its own account or for others and, accordingly, may at any time hold a long or short position in such securities. From January 1, 2007 through September 30, 2009, Centerview Partners and its affiliates have not received any compensation from either PepsiCo and its affiliates or PAS and its affiliates for corporate, commercial and investment banking services unrelated to the merger.

BofA Merrill Lynch and its affiliates comprise a full service securities firm and commercial bank engaged in securities, commodities and derivatives trading, foreign exchange and other brokerage activities, and principal investing as well as providing investment, corporate and private banking, asset and investment management, financing and financial advisory services and other commercial services and products to a wide range of companies, governments and individuals. In the ordinary course of its businesses, BofA Merrill Lynch and its affiliates may invest on a principal basis or on behalf of customers or manage funds that invest, make or hold long or short positions, finance positions or trade or otherwise effect transactions in equity, debt or other securities or financial instruments (including derivatives, bank loans or other obligations) of PepsiCo, PBG and certain of their respective affiliates.

BofA Merrill Lynch and its affiliates in the past have provided, currently are providing, and in the future may provide, investment banking, commercial banking and other financial services to PepsiCo and have received or in the future may receive compensation for the rendering of these services, including having (i) acted or acting as manager for various debt offerings of PepsiCo, (ii) acted or acting as a lender under PepsiCo’s credit facilities and (iii) provided or providing certain brokerage and treasury services to PepsiCo. From January 1, 2007 through September 30, 2009, BofA Merrill Lynch and its affiliates have received aggregate compensation from PepsiCo and its affiliates for corporate, commercial and investment banking services unrelated to the merger of approximately $19 million.

In addition, BofA Merrill Lynch and its affiliates in the past have provided, currently are providing, and in the future may provide, investment banking, commercial banking and other financial services to PBG and have received or in the future may receive compensation for the rendering of these services, including having (i) acted or acting as manager and/or bookrunner for various debt offerings of PBG and (ii) provided or providing certain treasury services to PBG. From January 1, 2007 through September 30, 2009, BofA Merrill Lynch and its affiliates have received aggregate compensation from PBG and its affiliates for corporate, commercial and investment banking services unrelated to the merger of approximately $9.2 million.

Preliminary Financial Analyses

Preliminary materials prepared by Centerview Partners and BofA Merrill Lynch were also provided to PepsiCo’s board of directors for board of directors meetings held on January 4, 2009 and April 19, 2009. These preliminary materials are contained in the deal financial section of each of the January 4, 2009 presentation and the April 19, 2009 presentation to PepsiCo’s board of directors, which have been filed with the SEC as part of the registration statement on Form S-4 of which this proxy statement/prospectus is a part. The following statements regarding the preliminary financial materials prepared by Centerview Partners and BofA Merrill Lynch contained in those presentations are qualified by reference to the full text of those presentations. In connection with PepsiCo’s board of directors meetings held on January 4, 2009 and April 19, 2009, PepsiCo did not request, and Centerview Partners and BofA Merrill Lynch did not provide, any opinions, including any opinion to PepsiCo, PBG or PAS or to any of their stockholders as to the fairness of the merger consideration or the PAS merger consideration, or any valuation of PBG or PAS for the purpose of assessing the fairness of the merger consideration or the PAS merger consideration to PepsiCo. In connection with PepsiCo’s board of directors meeting held on January 4, 2009 (but not the April 19, 2009 meeting), Centerview Partners and BofA Merrill Lynch prepared preliminary financial analyses substantially similar to the analyses presented in the August 3, 2009 presentation described in this proxy statement/prospectus (which has been filed with the SEC as part of the

 

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registration statement on Form S-4 of which this proxy statement/prospectus is a part), including preliminary analyses as to historical stock trading and equity analyst price targets, comparable publicly traded companies, discounted cash flow, precedent comparable transactions and precedent comparable squeezeout premiums. In performing these preliminary analyses Centerview Partners and BofA Merrill Lynch used substantially the same key assumptions, except for the following deviations. In the preliminary publicly traded companies analyses, Centerview Partners and BofA Merrill Lynch applied a reference range of 5.5x-6.5x, instead of 7.0x-8.0x, of enterprise value to calendar year 2008 estimated EBITDA, instead of calendar year 2009 estimated EBITDA, derived from the selected publicly traded companies to corresponding estimated EBITDA data of each of PBG and PAS. In the preliminary discounted cash flow analyses, Centerview Partners and BofA Merrill Lynch used a range of estimated free cash flow perpetuity growth rates of 1.0%-2.0%, instead of 1.5% (which is the midpoint of that range), and a discount rate of 7.5%, instead of a range of discount rates ranging from 7.0%-8.0% (the midpoint of which is the discount rate used in the preliminary discount cash flow analyses). Additionally, per PepsiCo’s management guidance, Centerview Partners and BofA Merrill Lynch assumed only $200 million of pre-tax run-rate synergies, instead of $300 million, and assumed the synergies would be allocated between PBG and PAS based on calendar year 2008 estimated EBITDA, instead of a 70%/30% synergy allocation between PBG and PAS. In the preliminary precedent transactions analyses, Centerview Partners and BofA Merrill Lynch applied a reference range of 8.0x-9.0x, instead of 8.0x-10.0x, of enterprise value to calendar year 2008 estimated EBITDA, instead of LTM EBITDA, derived from the selected transactions to corresponding estimated EBITDA data of each of PBG and PAS. In the preliminary precedent squeezeout premiums analyses, Centerview Partners and BofA Merrill Lynch applied a reference range of 15.0%-35.0%, instead of 25.0%-35.0%, of selected one day prior premiums paid to the price of PBG common stock and PAS common stock on the last day of trading prior to the respective presentation. Each of the preliminary analyses implied a price range for PBG common stock that was lower than the price range implied by similar analyses performed in the August 3, 2009 presentation, except for the 52-week trading range for PBG for the period ending December 31, 2008 (which was $15.78 to $42.02, instead of $15.78 to $35.10), and the analysts’ price targets presented January 4, 2009 (which ranged from $18.00 to $38.00, instead of, prior to PepsiCo’s initial public announcement of a proposal to acquire PBG, $20.00 to $31.00).

The opinions and financial analyses of Centerview Partners and BofA Merrill Lynch do not address any other aspect of the merger (including, without limitation, the fairness or appropriateness of the merger consideration to PBG or any of its stockholders) and do not constitute recommendations to any stockholder of any party to the merger as to how to vote or act in connection with the merger. The opinions and financial analyses of Centerview Partners and BofA Merrill Lynch were prepared for and delivered to the board of directors of PepsiCo and did not evaluate the merger or the merger consideration from the point of view of any party other than PepsiCo. PepsiCo did not request, and Centerview Partners and BofA Merrill Lynch did not provide, any opinion or financial analyses to PepsiCo, PBG or PAS or to any of their stockholders as to the fairness to the holders (in such capacity) of PBG common stock or PAS common stock of the merger consideration or the PAS merger consideration, or any valuation of PBG or PAS for the purpose of assessing the fairness to the holders (in such capacity) of PBG common stock or PAS common stock of the merger consideration or the PAS merger consideration. The opinions and financial analyses of Centerview Partners and BofA Merrill Lynch were not intended to be used by PBG’s stockholders in evaluating the merger or the merger consideration.

Accounting Treatment

The merger will be accounted for under the acquisition method of accounting, as such term is used under accounting principles generally accepted in the United States. Under the acquisition method, the assets acquired and the liabilities assumed are measured at fair value based on key assumptions of the acquisition, including prior acquisition experience, benchmarking of similar acquisitions and historical data. The final determination of the recognition and measurement of the identified assets acquired and liabilities assumed is based on an estimate of the fair market value of actual net tangible and intangible assets and liabilities of PBG at the closing date of the merger.

 

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Regulatory Approvals Required for the Merger

General

PepsiCo and PBG have agreed to use their reasonable best efforts to obtain all regulatory approvals required to consummate the transactions contemplated by the merger agreement. These approvals include approval under or notices pursuant to, the HSR Act and the competition laws and regulations of the European Union, the Republic of Turkey, the Russian Federation, Canada and Mexico. The transactions contemplated by the merger agreement have been approved by the competition regimes of the European Union, the Republic of Turkey, the Russian Federation, Canada and Mexico. In using its reasonable best efforts to obtain the remaining required regulatory approvals, PepsiCo or PBG may be obligated to sell, divest or dispose of certain of their assets or businesses (which may include the sale, divestiture or disposition of assets or businesses of the surviving corporation at or following the effective time of the merger) or take other action to avoid the commencement of any action to prohibit any of the transactions contemplated by the merger agreement, or if already commenced, to avoid the entry of, or to effect the dissolution of, any injunction, temporary restraining order or other order in any action so as to enable the closing of the merger to occur.

Under the terms of the merger agreement, neither PepsiCo nor PBG will be required to enter into any settlement, undertaking, consent decree, stipulation or agreement with any governmental authority in connection with the transactions contemplated by the merger agreement, or to divest or otherwise hold separate or take any other action, in each case, with respect to any of the material businesses, assets or properties of PepsiCo or PBG or any of their respective material subsidiaries.

Each of PepsiCo’s, PBG’s and Metro’s obligation to effect the merger is subject to, among other things, any applicable waiting period relating to the merger under the HSR Act and any agreement between PepsiCo, PBG and any governmental authority not to consummate the merger prior to a specific date having expired or been terminated. See “The Merger Agreement—Conditions to the Completion of the Merger” and “The PAS Merger” beginning on pages [—] and [—], respectively, of this proxy statement/prospectus.

Department of Justice, Federal Trade Commission and Other United States Antitrust Authorities

The transactions contemplated by the merger agreement and the PAS merger agreement are subject to the HSR Act. The HSR Act and related rules prohibit the completion of transactions such as the merger unless the parties notify the Federal Trade Commission, or the FTC, and the Antitrust Division of the Department of Justice, or the DOJ, in advance. The HSR Act further provides that a transaction notifiable under the HSR Act, such as the merger and the PAS merger, may not be completed until the expiration of a 30 calendar-day waiting period, or the early termination of that waiting period, following the parties’ filing of their respective HSR Act notification forms. If the DOJ or the FTC issues a Request for Additional Information and Documentary Material prior to the expiration of the waiting period, the parties must observe a second 30-day waiting period, which would begin to run only after both parties have substantially complied with the request for information, unless the waiting period is terminated earlier. It is common practice for parties to agree to provide for additional time prior to completion of the transaction even after the expiration of the waiting period in order to provide additional time for governmental review of the transaction.

PepsiCo and PBG each filed its required HSR notification and report form with respect to the merger on September 11, 2009 and each of PepsiCo and PAS filed their required HSR notification and report form with respect to the PAS merger on September 11, 2009, in each case, commencing the initial 30-day waiting period. On October 9, 2009, PepsiCo withdrew its PBG and PAS notification and report forms effective October 13, 2009 and refiled them on October 15, 2009 in order to allow more time for the staff of the FTC, the agency reviewing the merger and the PAS merger, to review the proposed transactions. On November 10, 2009, PepsiCo announced that it had again withdrawn its PBG and PAS notification and report forms to give the FTC more time to review the proposed transactions and plans to refile at the appropriate time. PepsiCo, PBG and PAS are

 

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working cooperatively with the FTC and, as of the date of this proxy statement/prospectus, expect to close each of the merger and the PAS merger by the end of the first quarter of 2010.

At any time before or after the merger or the PAS merger is completed, the FTC could take action under the antitrust laws in opposition to the merger or the PAS merger, including seeking to enjoin the transaction or seeking divestiture of substantial assets of PepsiCo, PBG or PAS or their subsidiaries. Private parties also may seek to take legal action under the antitrust laws under some circumstances. Based upon an examination of information available relating to the businesses in which the companies are engaged, PepsiCo and PBG believe that the merger will, and PepsiCo believes that the PAS merger will, receive the necessary regulatory clearance. However, PepsiCo and PBG can give no assurance that a challenge to the merger on antitrust grounds will not be made, or, if such a challenge is made, that PepsiCo and PBG will prevail.

In addition, the merger may be reviewed by the attorneys general in the various states in which PepsiCo and PBG operate. There can be no assurance that one or more state attorneys general will not attempt to file an antitrust action to challenge the merger.

Timing

There can be no assurance that all of the regulatory approvals described above will be obtained and, if obtained, there can be no assurance as to the timing of any approvals, ability to obtain the approvals on satisfactory terms or the absence of any litigation challenging such approvals. There can also be no assurance that the DOJ, the FTC or any state attorney general or any other governmental entity or any private party will not attempt to challenge the merger on antitrust grounds, and, if such a challenge is made, there can be no assurance as to its result.

Neither PepsiCo nor PBG is aware of any material governmental approvals or actions that are required for completion of the merger other than those described above. It is presently contemplated that if any such additional material governmental approvals or actions are required, those approvals or actions will be sought. There can be no assurance, however, that any additional approvals or actions will be obtained.

Material United States Federal Income Tax Consequences

General

In the opinion of Davis Polk & Wardwell LLP, counsel to PepsiCo, and Cravath, Swaine & Moore LLP, counsel to PBG (together with PepsiCo’s counsel, “tax counsel”), the following are the material United States federal income tax consequences of the merger to U.S. Holders (as defined below) of PBG common stock. This discussion is based on the Code, applicable Treasury regulations, administrative interpretations and court decisions as in effect as of the date of this proxy statement/prospectus, all of which may change, possibly with retroactive effect. For purposes of this discussion, a “U.S. Holder” is a beneficial owner of PBG common stock that is for United States federal income tax purposes:

 

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a citizen or resident of the United States;

 

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a corporation, or other entity taxable as a corporation for United States federal income tax purposes, created or organized in or under the laws of the United States or of any political subdivision thereof; or

 

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an estate or trust the income of which is subject to United States federal income taxation regardless of its source.

This discussion addresses only the consequences of the exchange of shares of PBG common stock held as capital assets. It does not address all aspects of United States federal income taxation that may be important to a U.S. Holder in light of that stockholder’s particular circumstances or to a U.S. Holder subject to special rules, such as:

 

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a financial institution or insurance company;

 

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•

a tax-exempt organization;

 

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a dealer or broker in securities;

 

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a stockholder who holds PBG common stock as part of a hedge, appreciated financial position, straddle, or conversion or integrated transaction; or

 

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a stockholder who acquired PBG common stock pursuant to the exercise of compensatory options or otherwise as compensation.

If a partnership holds the shares of PBG common stock, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. A partner of a partnership holding shares of PBG common stock should consult its tax advisors.

This discussion of material United States federal income tax consequences is not a complete analysis or description of all potential United States federal income tax consequences of the merger. This discussion does not address tax consequences that may vary with, or are contingent on, individual circumstances. In addition, it does not address any non-income tax or any foreign, state or local tax consequences of the merger. Accordingly, each PBG stockholder should consult his or her own tax advisor to determine the particular United States federal, state or local or foreign income or other tax consequences to him or her of the merger.

Tax Opinions

PepsiCo has received an opinion of Davis Polk & Wardwell LLP, and PBG has received an opinion of Cravath, Swaine & Moore LLP, each dated as of the date of this proxy statement/prospectus that, based on certain representations, covenants and assumptions described below, all of which must continue to be true and accurate in all material respects as of the effective time of the merger, the merger will be treated for United States federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code and t