PepsiAmericas, Inc. History

Address:

4000 Dain Rauscher Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
U.S.A.

Telephone: (612) 661-4000
Fax: (612) 661-3737

Public Company
Incorporated: 1962 as Illinois Central Industries, Inc.
Employees:14,500
Sales: $3.2 billion (2003)
Stock Exchanges: New York
Ticker Symbol:PAS
NAIC: 312111 Soft Drink Manufacturing; 333415 Air Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing; 811112 Automotive Exhaust System Repair

Company Perspectives:

Our vision is to be, by all relevant measures, the best performing beverage company worldwide. Mission. At first glance, PepsiAmericas' mission seems straightforward--"We make, sell and deliver beverages." But, in the competitive bottling industry, it takes a commitment to excellent service, preferred products, strong external relationships and keen business strategy to be the world's third largest bottling company.

Key Dates:

1851:: Illinois Central Railroad is chartered and operates only inside Illinois.
1867:: Company is running trains in states to the south and west.
1962:: Business is reorganized as a holding company, Illinois Central Industries, in order to diversify.
1975:: Name is changed to IC Industries, Inc.
1978:: Company begins entering food-related businesses.
1988:: Corporate emphasis is now on consumer goods; name is changed to Whitman Corporation.
1995:: Company announces plans to increase revenues through global operations.
1997:: Divestiture of non-bottling operations is completed.
2000:: Company acquires PepsiAmericas, Inc., adopting the new name the following year.

Company History:

PepsiAmericas, Inc. is the result of the merger of the second- and third-largest bottlers in the Pepsi system. Predecessor Whitman Corporation, known until 1988 as IC Industries, owned and operated the largest independent Pepsi bottler company, the largest franchise for car services, and one of the leading manufacturers of refrigerators in the world, along with several other manufacturing divisions. The company, which began as a railroad operation, divested itself of non-bottling businesses completely in 1997. Whitman acquired PepsiAmericas, Inc. in 2000, and took the smaller company's name the following year.

Running the Rails: 1850s-1960s

Whitman has a company history dating back to 1851, when a group of European bankers decided to take advantage of the growing railroad business in the United States. Initially, the railroad, named the Illinois Central, was operated only inside Illinois, but just after the U.S. Civil War the company began a vigorous expansion plan, incorporating more than 200 railroads into its system. By 1867 the railroad had crossed the Mississippi into Iowa, eventually stretching southward through Kentucky, Tennessee, Arkansas, Alabama, Mississippi, and on to New Orleans. Additional Illinois Central lines ran to South Dakota, Minnesota, Wisconsin, Indiana, Missouri, and Nebraska. For more than a hundred years the Illinois Central Railroad hauled freight and passengers up and down the Mississippi Valley and throughout the northern portion of the Midwest.

On August 31, 1962, the railroad was incorporated as Illinois Central Industries, Inc. Under William Johnson's leadership the company had a new goal--diversification. The Johnson blueprint called for the building of a consumer and commercial products conglomerate by using company cash and stock to buy other businesses, and company tax credits to shelter their earnings. With the single-mindedness typical of its president, the company began methodically to work toward that end.

The first dramatic step was taken in 1968 when the company ventured into the non-rail business, purchasing the Abex Corporation. Formerly known as American Brake Shoe and Foundry, the company produced brakes, wheels and couplings for railroad cars, brake linings for cars and trucks, hydraulic systems for airplanes and ships, and specialty metal castings for industrial uses such as sugar mills and locomotives.

Diversification Drives Train: 1970s to Early 1990s

Sixteen years after this initial acquisition, Johnson bought the Pneumo Corporation, a Boston-based aerospace, food, and drug company, for $593 million. The Pneumo purchase was viewed as a means of increasing overall revenue. The subsidiary also provided income from its military contracts, and gave credence to Johnson's theory of growth through acquisition. Over a year later he orchestrated the merger of Abex and Pneumo, forming the Pneumo Abex Corporation.

In 1970 Illinois Central Industries diversified into the real estate business by becoming a major partner in the Illinois Center. The Center, a complex of office buildings, hotels, and condominiums, sprawled across 83 acres of lakefront property in downtown Chicago. In another real estate transaction, the company sold land it owned in New Orleans so that the city could build its athletic stadium, called the Superdome, on the site. Illinois Central Industries maintained ownership of 11 adjoining acres for future developments that included the Hyatt Regency hotel. The company would also develop an array of industrial parks in or near Fort Lauderdale, Memphis, and New Orleans.

This diversification toward real estate came at a time of increasing debate over what role the traditional railroad business should play in the evolving structure of the company. The faltering railway operations, on the one hand, were aided by a merger with the Gulf, Mobile, and Ohio Railroad, which was a combination of several railroads including: the Gulf, Mobile, and Northern, the Mobile and Ohio, and the Chicago and Alton. The merger was formally completed on August 10, 1972, and the new line was named the Illinois Central Gulf Railroad by the parent company.

The sale of some of the company's prime property, on the other hand, indicated movement away from continuing the railroad business. Indeed, by the late 1970s Johnson vacillated back and forth, placing the railroad for sale on the market and then removing it. Eventually, the piecemeal sale of the line proved immensely profitable and solidified Johnson's reputation as an astute businessman.

When the railroad was first placed on the market, no serious purchaser stepped forward, mainly because Johnson had let the railroad deteriorate through lack of maintenance. Johnson then decided to dismantle the line and sell it part by part. This process was greatly aided by capital improvements and rail deregulation during the mid-1980s, and Johnson netted handsome profits for his company.

As Johnson's strategy of diversification unfolded, the company changed its name in 1975 to IC Industries, Inc. Three areas of business were identified as important and company acquisitions fell into these categories: consumer products, commercial products, and railroad activities. The holding company was structured around decentralized management and a growing list of subsidiaries that maintained primarily autonomous operations.

In the consumer products group, a 1978 acquisition brought in the Pet Company, the St. Louis, Missouri, firm that produced evaporated milk. Expansion into a variety of food products followed, including Whitman Chocolates and Old El Paso, the best selling brand of Mexican foods in the United States. By the early 1990s, the enterprise had grown to 30 owned and eight leased manufacturing plants located in the United States and six foreign countries.

The Hussmann Corporation, a manufacturer of refrigeration equipment for food retailers and processors, composed an important branch of IC's commercial products group. In the early part of the 1980s Hussmann suffered a slump in sales and profits, but by 1984 the subsidiary regained its profitable standing and earned about $44 million before taxes. Later that same year, Hussmann acquired Riordan Holdings, Ltd., a London-based producer of food refrigeration equipment, which served to heighten Hussmann's overseas profile. By the early 1990s there were 20 Hussmann-owned and ten leased manufacturing facilities in the United States, Mexico, the United Kingdom, and Canada, as well as three owned and 95 leased branch facilities in these same countries (excluding Mexico) that sold, installed, and maintained Hussmann products.

In the early 1990s, the Pneumo Abex Corporation manufactured products that fell into three basic components: aerospace, industrial, and fluid power products. There was stiff competition, particularly in the aerospace business, but IC regarded the competition as a challenge to invest more of its dollars and technology in the field, enabling it to compete with larger firms such as Cleveland Pneumatic Company. Industrial products included braking materials for the automotive original equipment and replacement outlets, and safety equipment for recreational vehicles, trucks, and automobiles. Products were manufactured for use in mining, earthmoving, steel making, and food processing, to name a few. Canadian and U.S. railroads were markets for the iron and composition brake shoes, cast steel wheels, and custom-made track work manufactured by Pneumo Abex. Fluid power products included complete hydraulic systems used in construction and mobile equipment, industrial and marine machinery, materials-handling equipment, offshore drilling, and nuclear power plants. This division also manufactured products for aerospace and general aviation markets from 33 plants in the United States and 16 abroad.

When market analysts examined William Johnson's formula for corporate success, which entailed pruning acquisitions of all but their most profitable divisions, they most often looked to Pet, the largest subsidiary in Whitman's $1.8 billion consumer division of the early 1990s. One year following the acquisition of Pet, its pretax profits almost tripled to an estimated $85 million in 1984, on a revenue increase of 33 percent. Part of Johnson's carefully crafted plan involved selling low-return operations. Over one six-year period, 22 of Pet's units, with sales totaling $400 million, were sold in order to funnel money into Pet's more profitable products.

Pepsi-Cola General Bottlers was the second largest franchise bottler of Pepsi-Cola beverages in the United States, in the early 1990s, claiming the greatest share of the soft drink market in Chicago, Cincinnati, Kansas City, and Louisville. This branch of Whitman's consumer products group also handled other soft drinks, including Dad's Root Beer, 7-Up, Dr. Pepper, Orange Crush, Canada Dry, and Hawaiian Punch. In 1984 Pepsi General garnered only minimal profits, partly because of heavily discounted prices and partly because both Pepsi-Cola and Coca-Cola introduced new products to the consumer. However, for the next two years Pepsi General's sales growth averaged 7 percent, outstripping the industry's as a whole.

Another of Whitman's major consumer product holdings was Midas International, a company that made and installed automotive exhaust, suspension, and braking systems through approximately 2,000 franchised and company-owned Midas shops in the United States, Canada, England, France, Australia, Belgium, Germany, Austria, Panama, and Mexico, in the early 1990s. Originally specializing in replacement mufflers, Midas had broadened its range to include repairing and replacing brakes and shock absorbers at about 95 percent of its outlets. The expansion of services accounted for an estimated 9 percent profit growth shown during 1985 through 1986.

When Johnson retired in 1987, the new leadership was committed to continuing his strategy for the company. Under Chairman Karl D. Bays, IC Industries changed its name to Whitman Corporation in 1988 to emphasize its focus on consumer goods and services. Part of this strategy included selling over 65 companies, such as the Pneumo Abex aerospace operation and spinning off the remnants of its Illinois Central Railroad holdings to shareholders. Management also decided to sell most of its real estate holdings. Yet during the same time, Bays went on an acquisition rampage and purchased nearly 100 new companies, including Orval Kent salad products and Van de Kamp's frozen seafood products. When Bays died in November 1989, Whitman was well on its way toward a reorganization of its product lines.

Whitman's board of directors appointed James W. Cozad, an Amoco vice-chairman, to take Bays's place. Cozad was determined to transform Whitman into an even tighter organization, and immediately announced another restructuring of the company. His strategy was to encourage Whitman's growth by focusing on Pet Inc., Pepsi-Cola General Bottlers, and Midas International, while selling Hussmann and its manufacturing facilities for supermarket refrigerators. But sales for both Pet and Hussmann decreased substantially due to greater market competition, and Cozad was forced to take Hussmann off the market when no acceptable offer to purchase it was forthcoming.

Undismayed, Cozad embarked on a new reorganization strategy. He decided to concentrate on just three businesses, Pepsi-Cola Bottlers, Midas International, and Hussmann refrigerators. As a result, Whitman spun off Pet Inc. to its shareholders and lost such well-known brands as Old El Paso, Progresso, and Whitman Chocolates. At the same time, the company eliminated a significant number of jobs in order to reduce its long-term debt of $1.9 billion.

When Whitman changed leadership in 1992, with Bruce Chelberg replacing Cozad, there was no disruption in the development of the company. Chelberg put all his energy into developing the three core businesses of Whitman. Hussmann upgraded its operations throughout its domestic and foreign facilities. Pepsi-Cola General Bottlers doubled production capacity at its Chicago plant, installed state-of-the-art canning equipment, and entered into a joint venture with Grayson Mountain Water to produce a new one-calorie beverage. Midas International continued to expand its international car service network with new outlets in Mexico and Europe.

Under Chelberg's direction, all of Whitman's holdings fared well. Pepsi-Cola's operating profit increasing by 18 percent in 1993, led by its core brands of Pepsi-Cola and Diet Pepsi. Midas operating profits for 1993 were up 7 percent from the previous year, with sales steadily increasing in Mexico. Hussmann operating profits were down, but demand for supermarket refrigerators appeared to be on the rise in Britain, Mexico, and Canada. With its operations so successfully diversified, profitability seemed likely for Whitman as it headed toward the last years of the 20th century even if one or even two of its core businesses began to exhibit problems.

Tightened Focus: Mid-1990s to 2004

Whitman's 1996 sales rose 5.6 percent, to $3.1 billion. Net income climbed to $139.4 million from $133.5 million in the prior year. It was the fifth consecutive year of sales and earnings records for the company. Pepsi General Bottlers' operating profits were up in the United States but losses continued in Poland, a territory in development since 1995. Midas International's operating profits were also down, due to slow domestic retail and wholesale action and increased operating expenses. Hussmann Corporation's sales exceeded $1 billion for the first time on a strong domestic demand for supermarket equipment and improvement on the Mexican front.

In June 1997, the company announced plans to spin off Hussmann Corporation and Midas International to shareholders. Hussmann was the world's largest supplier of refrigeration systems for the food industry and operated in nine countries. Midas International was the world's largest automotive service operation with more than 2,500 stores in 17 countries.

Whitman would thereafter concentrate on the beverage business that brought in half of sales and more than half of operating income. Pepsi General Bottlers was the world's largest independent Pepsi-Cola franchisee with about 12 percent of U.S. volume and distribution rights in Poland, Russia, and the Baltics.

In January 1999, PepsiCo announced a realignment agreement of bottling territories. Whitman Corporation would become a master Pepsi-Cola bottler gaining territories in Illinois, Indiana, Missouri, Ohio, the Czech Republic, the Slovak Republic, Hungary, and Poland. Those businesses generated revenue of about $540 million in the United States and $180 million in central Europe, in 1998. Whitman, in turn, would transfer operations in Virginia, West Virginia, and Russia to PepsiCo, assume liabilities for domestic territory gained, and pay cash for the international business.

As part of the agreement, U.S. PepsiCo would transfer back its 20 percent stake in Whitman's Pepsi-Cola General Bottlers, but would ultimately hold a 40 percent stake in the newly created shares of Whitman Corporation. The transaction would boost Whitman's percentage of U.S. can-and-bottle volume to 17 percent and more than quadruple its international bottle volume.

In August 2000, Whitman, the second largest Pepsi bottler in the U.S. and one of five anchor bottlers for PepsiCo, announced plans to buy out PepsiAmericas, Inc., the nation's third largest Pepsi bottler. PepsiAmericas, formed from independent bottlers Delta Beverage, Pepsi-Cola Puerto Rico, and Dakota Beverage, had sales of $576 million versus Whitman's approximately $2.4 billion. The deal would give Whitman new territory in the south, the Dakotas, and the Caribbean.

In November, Whitman acquired PepsiAmericas for $331.7 million, boosting Whitman's U.S. market share. But its numbers still added up to less than half the 55 percent share held by Pepsi Bottling Group Inc.--a 1999 spinoff from PepsiCo.

According to Crain's Chicago Business, analysts liked the move by Whitman, but the proposed action did little to drive up its stock, which was down about 46 percent from its December 1998 peak. Other bottlers' shares had been off as well, partly due to a sales drop linked to a 1999 boost in prices.

In January 2001, Whitman changed its name to PepsiAmericas, Inc. In November, PepsiAmericas' former chairman and CEO Robert C. Pohlad succeeded Chelberg as head of the company. PepsiAmericas ended the year by expanding its operations to Barbados, but there was another task underlying these highlights.

"After the merger, we needed to integrate three separate companies into one cohesive business," PepsiAmericas Chairman and CEO Pohlad explained in a May 2004 Beverage Industry article. "It involved integrating strategies, systems and culture. In 2003 our hard work paid off and we began to see positive results from a cost, pricing, volume mix and systems perspective. Everything began to click."

On the year, the company succeeded in improving earnings per share, return on invested capital, and bringing international operations to profitability. PepsiAmericas, thanks to a Pepsi-preferring triangle formed by Cleveland, Fargo, and New Orleans, distributed nearly 19 percent of all Pepsi-Cola products sold in the United States. And internationally, the company made strides though greater recognition of consumer preferences and operating improvements.

Principal Competitors: Coca-Cola Enterprises; Dr. Pepper/Seven-Up Bottling.

PepsiAmericas, Inc. History

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Key Dates:

Company History:

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