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Staff attorneys at the Federal Trade Commission (FTC) recommended the agency go to court to block soft-drink giant Pepsico Inc.'s bid to buy Quaker Oats Co. because of concerns that the combined company would dominate the market for sports drinks, Reuters reported.
The recommendation was based on fears that Pepsi's acquisition of Quaker Oats' popular Gatorade brand would hurt competition in the sports-drink business, despite Pepsi's offer to sell off its own All Sport line of sports drinks, the report said. The commission is expected to vote on the case within the next several weeks.
An FTC spokeswoman said the deal is still under investigation and declined to comment. Pepsi spokesman Dick Detwiler said the company would not comment on the details of the FTC negotiations. "We're continuing to talk to the FTC," he said. "We don't know of any legitimate reason why this merger should be blocked."
Quaker's Gatorade would be a major boost to Pepsi's lineup, adding almost 10 percent to the company's U.S. drinks sales. Gatorade owns a 78-percent share of U.S. sports drink volume last year, while Pepsi archrival Atlanta-based Coca-Cola Co.'s Powerade line controlled 15 percent and Pepsi's All Sport had just 4.4 percent, the report said.
Pepsi said in May that it plans to sell All Sport to Monarch Co., the Atlanta-based maker of Dad's Root Beer, for an undisclosed amount "in the absence of any objections by the Federal Trade Commission."
Antitrust experts consider the Pepsi-Quaker Oats case a close call. Opposing the deal could be difficult because Pepsi currently has only a small share of the sports drink market through All Sport. Nevertheless, FTC attorneys fear that All Sport might disappear altogether if it is cut off from Pepsi's distribution system, according to Reuters.
Aside from the issue of sports drink dominance, FTC staff members have made detailed inquiries about whether the addition of Gatorade would give Pepsi a dominant position in the market for cold drinks sold at convenience stores, the report said.
A source close to the negotiations told Reuters the FTC staff has been asking more questions on the convenience store issue than about the sports drink market, but added that this was apparently because the issue of convenience store dominance is less clear-cut. "I know that they viewed the convenience store issue as more complex," the source was quoted as saying.
News of the FTC's recommendation was viewed as an early victory for Coke, which stands to be the big winner if the recommendation is accepted by regulators. "It's a bad day in Purchase, New York and a good day in Atlanta," said independent beverage industry consultant Emanuel Goldman.