The FTC is preparing a case against the PepsiCo/Quaker merger. The Commission is worried the merger will diminish the ability of smaller sports drinks brands to compete on store shelves and in distribution channels.

PepsiCo’s sale of its AllSport drink doesn’t help, as many believe the brand will disappear anyway. But while pundits are savoring the idea the deal could be blocked, it’s still most likely to go through.

It emerged this week that Federal Trade Commission staff members are preparing documentation to make a case against the PepsiCo/Quaker Oats merger. Word is that the FTC believes the $13.8 billion merger, approved by shareholders last month, would create an anti-competitive atmosphere within the sports drink market and give the company unfair control over its relationship with convenience stores.

The sports and energy drinks market has recently shown signs of finally emerging as a mature market – the category grew an impressive 7.5% from 1999 to reach $1.89 billion in 2000. Volume jumped 6.4% to reach 679.5 million gallons in the same period. Currently Quaker’s Gatorade brand accounts for 80% of the market.

No wonder, then, that small manufacturers and the FTC are concerned about maintaining a competitive balance. They are also unhappy with PepsiCo’s recent sale of Allsport, its sports drink, to Monarch, fearing the brand will eventually disappear in the hands of the small Atlanta-based beverage company. PepsiCo also recently acquired a cousin of Gatorade, SoBe brand beverages, adding to the competitive fire.

In the meantime, industry watchers remain focused on the national sports drink market and whether other drink manufacturers will be able to compete with Gatorade, which already controls the US market, after it has the backing of Pepsi.

At close Wednesday, the spread between the price at which Quaker’s stock was trading and the price offered seven months ago for Quaker by Pepsi widened to more than 10%, from 6.6% at the close Monday. A widening spread can be an indication that investors are worrying about whether the deal will close.

While most sources believe that the deal will not be killed, the longer the government delays, the more skittish investors get.

Pepsi said earlier this month that the deal would be delayed until Q3 as talks with regulators continue, and odds-on the company’s right. But as GE/Honeywell, Interbrew/Bass and Tyson/IBP all show, nothing’s certain in the world of mega-mergers.

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