2nd UPDATE:Pepsi Bottling Says Pepsi Bid 'Grossly Inadequate'

Pepsi Bottling Group Inc. (PBG) rejected a nearly $4.2 billion offer from PepsiCo. Inc. (PEP) to buy the remaining two-thirds stake it doesn't already own of its biggest bottler, saying the bid "is grossly inadequate."

The bottler's refusal will be viewed as more of a negotiating tactic than an outright renunciation of the deal. Pepsi Bottling and PepsiAmerica's Inc. (PAS), also the subject of a bid from Pepsi, have both been widely expected to negotiate for a higher offer. The deals are still likely to go through, analysts say, but at higher prices from the original offer.

Since Pepsico launched its bids for Pepsi Bottling and No. 2 bottler PepsiAmericas last month, Pepsi Bottling shares have been trading above the implied $29.50 cash and stock offer price, closing Friday at $31.41. PepsiAmericas hasn't yet made a recommendation on the bid it received from Pepsi, although its response is also likely to be along the same lines.

ConsumerEdge Research expects the ultimate takeout prices to be closer to $38 a share for Pepsi Bottling and $28 for PepsiAmericas. Analyst Bill Pecoriello noted that he expects the transactions to get done and that the bottlers could meet PepsiCo midway. For instance, he said, Pepsi Bottling could ask for a price in the low to mid $40 range, but might settle for around $38.

"If PepsiCo has anything further to say, then we would be willing to listen," said Pepsi Bottling spokesman Jeff Dahncke. The bottler didn't say what price it would consider adequate. PepsiCo didn't comment.

In a letter to Pepsi Chairman and Chief Executive Indra Nooyi, Pepsi Bottling Chairman and CEO Eric Foss and lead independent director Ira Hall wrote the Pepsi bid had "opportunistic timing," coming days before Pepsi Bottling reported "strong" first-quarter results that topped analysts' expectations. The company also boosted its expectations for the year and announced plans for more than $250 million in 2009 cost savings.

The duo said the Pepsi bid offers "virtually no premium," even though it is 17% above the prior session's closing price when made public. Foss and Hall said they believe Pepsi has "substantially understated the synergies" which would come from a merger. They said likely savings would be "multiples" of the $200 million Pepsi said was possible.

The two closed by writing that Pepsi Bottling "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."

-By Anjali Cordeiro and Kevin Kingsbury, Dow Jones Newswires; 201-938-2136; [e-mail]