The Pepsi Bottling Group, (PBG) the world's largest manufacturer, seller and distributor of Pepsi-Cola beverages has rejected Pepsi's $4.2-billion cash-and-stock takeover proposal yesterday, citing the bid as ''grossly inadequate.''

Last month, Pepsi had offered to buy all the outstanding shares of common stock it does not already own in its two largest anchor bottlers, The Pepsi Bottling Group (PBG) and PepsiAmericas (PAS), for $29.50 and $23.27 per share respectively - a premium of 17.1 per cent over the closing price of the common stock of each company on 17 April. (See: Pepsi offers to buy out its two bottlers for about $6 billion)

PBG, whose annual sales turnover is nearly $14 billion, said in a letter to Chairman and CEO of Pepsi Indra Nooyi that its board of directors has rejected Pepsi's offer, since the board concluded that the proposal was grossly inadequate and not in the best interests of PBG and its stockholders.

PGB said that the 17.1 per cent premium that Pepsi was paying was inadequate since the proposal was made just prior to the public release of PBG's strong first quarter 2009 earnings released on 22 April.

''PBG has exceeded Wall Street expectations for the quarter, raised its full-year guidance for earnings per share and operating free cash flow, and provided details of its plans to achieve over $250 million in cost and productivity savings in 2009 on a standalone basis,'' the bottler said.

PBG said that that Pepsi's proposal was substantially below PBG's intrinsic value and there was virtually no premium to market given PBG's first quarter earnings and upward revision to full-year EPS and operating free cash flow guidance.

Pepsi already owns 33.1 per cent of PBG stock and 43 per cent of PAS and since both bottlers have reported good FQ results and have increased their earning forecast for the year, analysts believe that it is highly likely that even PAS will reject Pepsi's offer.

While making the offer, Pepsi had said that the consolidation of its bottlers would bring in a saving at least $200 million a year, but PBG believes that the synergies would bring in savings in multiples of $200 million, based on its own internal analysis.

Some analysts feel that Pepsi would realistically save at least $600 million annually and it should hike its offer to PGB from the present $29.50 a share to at least $38 a share while simultaneously increase its offer to PAS from $23.27 per share to $28 a share.

In a bid to thwart any hostile takeover from Pepsi, PBG has swallowed the 'Poison Pill' and said that the board has taken customary steps to protect PBG and its stockholders from opportunistic acquisition attempts by adopting of a stockholder rights plan, retention arrangements for certain key employees and amendments to PBG's bylaws regarding notice and informational requirements for stockholder actions.