Capital Structure

During the reported quarter, cash from operations was $512 million versus $628 million in 3Q08, mainly due to a lower benefit from the change in working capital.  Change in working capital during the quarter was $25 million in 3Q09 versus ($142) million in 3Q08.  During the quarter, accounts receivable days moved up by 3 days while inventory days went up by 1 y-o-y while accounts payable days moved up by 8 days versus the prior-year quarter.  Capital expenditure declined to $131 million versus $181 million in 3Q08.   Free cash flow was $384 million in the quarter versus $447 million in 3Q08.

Net debt at the end of 3Q09 was $5.0 billion, down from $5.4 billion at the end of 2Q09.

Management expects operating free cash flow to be approximately $550 million for FY09, an increase of $100 million from the beginning of 2009, including increased pension funding and foreign currency headwinds but excluding advisory fees related to the pending PepsiCo transaction.

The Company anticipates capital expenditures to be about $550.0 to $600.0 million for FY09.  PBG continues to be disciplined in its capital spending and working capital management.

PBG repurchased approximately 15 million shares in 2008. The Company did not repurchase shares in the reported quarter.

Advisory Fees

On August 3, 2009, PBG and PepsiCo entered into a definitive merger agreement, under which PepsiCo would acquire all outstanding shares of PBG common stock it does not already own.  The transaction is subject to PBG shareholder approval and certain regulatory approvals, which are to be finalized by 2010.

In connection with this transaction, the Company retained certain external advisors and consequently expects to incur aggregate fees in the range of $40 million to $60 million.  For the 12 and 36 weeks ended September 5, 2009, the Company has recorded pre-tax charges of $22 million, or $0.09 per diluted share, and $37 million, or $0.13 per diluted share, respectively, relating to these services.

Tax Audit Settlements

During 3Q09, PBG settled various audits in its international jurisdictions, which resulted in a tax benefit of $40 million after non-controlling interests, or $0.18 per diluted share.

During 3Q09,  the statute of limitations closed for its 2005 U.S. tax audit.  As a result, PBG anticipates a tax benefit related to this item of $17 million, or $0.07 per diluted share.

Acquisition by PEP

On August 4, 2009, PepsiCo Inc. (PEP) announced that it agreed to acquire its two large bottlers, The Pepsi Bottling Group Inc. (PBG) and PepsiAmericas Inc. (PAS), in a $7.8 billion cash and stock deal.  Under the terms, PBG shareholders will get either $36.50 in cash or 0.6432 of a PepsiCo share for each PBG share they hold, subject to a proration such that the aggregate price to be paid to PBG shareholders shall be 50% cash and 50% PepsiCo common stock.  The deal will allow PepsiCo to control 80% of its North American beverage volume distribution.

PBG believes there is $750-$850 million in synergies that can be gained by a three-way transaction and  PEP’s offer is grossly inadequate.  PEP responded with a press release reiterating its belief that synergies would be at least $200 million and that there is no justification for PBG’s estimate.

Most of the brokers in the Digest group are of the opinion that the deal will take place if PEP offers a higher acquisition price to PBG in the near term.

One firm believes the offer from PepsiCo to buy all of its shares outstanding (not currently owned by PepsiCo) for $36.50 a share in cash or 0.6432 PepsiCo shares for each share of PBG is expected to close in 4Q09 or early FY10. It expects the transaction to gain the necessary legal and shareholder approval.

Increase in competition: Competition from CCE remains the primary concern for PBG. Coke has always been a formidable rival and the ramping up of its marketing spending is likely to affect some of Pepsi’s products.

Slowdown of CSD market: The dwindling demand for CSDs in the U.S. is a matter of concern for PBG as many of its prime brands are CSDs.

Rising raw materials costs: The mounting raw materials costs (including the rising oil prices and aluminum costs) continue to suppress PBG’s operating income growth.