MERGER: Pepsi and Pepsi Americas

Issue: How do I enter the Pepsi (PEP) and Pepsi Americas (PAS) merger?

Cause:

Pepsi completed its merger with the Pepsi Americas for cash and Pepsi stock on 2/26/2010.
The SEC filing for this merger can be found at through the Pepsi web site at:
http://www.pepsico.com/Investors/SEC-Filings.html
Choose the S-4A filing of 1/12/10. There are 2 with this date. One for the PAS merger and one for the PBG merger.
For the final proportion of cash to stock you can see the press release at this url:
http://www.pepsico.com/PressRelease/PepsiCo-Announces-Final-Results-of-Elections-Regarding-Merger-Consideration-for-03022010.html

Resolution:

This merger is a cash plus stock reorganization, which are becoming more and more frequent in recent years. All the information below is from the information available from the S-4 and form 425 filed with the SEC.
This merger had an election so that shareholders could elect all cash, all shares or their proportion of cash and shares. The cash portion was limited to paying 28.50 for half of all PAS shares. If the cash election was oversubscribed, it would be pro-rated so that Pepsi paid cash for only half of the outstanding PAS shares. According to information from Pepsi, if you made no election, 48.32% of your shares were exchanged for cash and 51.68% of shares were exchanged for .5022 shares of PEP for each remaining shares of PAS.

First, if you have made any entries for this transaction in the Club Accounting software, you should delete them. There are 3 possibilities with this merger depending on your election. Those possibilities are: i) received all cash, ii) received only shares of PEP, iii) received PEP shares and cash. Each option is treated differently in how it is entered in the accounting program.

All Cash – If you elected to receive all cash and only received cash, treat this transaction as a sale. The proceeds should be approximately 28.50 x (# of PAS shares owned). Check your broker statement for the exact amount.

All PEP shares – If you elected to receive only PEP shares and received only PEP shares then treat this as a simple merger. If you are unfamiliar with merger transactions help can be found at the ICLUBcentral web site at http://www.iclub.com/support/kb/default.asp?page=normal_merger.
This transaction closed 2/26/2010.
The closing price of Pepsi on this date was 62.03.
Use the cash price Pepsi paid for PAS, 28.50
The number of Pepsi shares you were entitled to receive was (# of PAS shares owned) x .5022
Remember to include the fractional part in entering the shares received.
Also remember to enter the cash-in-lieu of fractional shares. This should be on your broker statement.

Cash and PEP shares
– These instructions assume you did not make an election and received the default cash for 48.32% of your PAS shares and received new PEP shares for 50.6% of your PAS shares.
To record this merger will require multiple entries in the accounting software. The basic outline of these entries is given below:

Enter a large Return of capital transaction to have the program calculate the capital gain reportable for this merger.
Write down the capital gains, both long-term (LTCG) and short-term (STCG).
Delete the large Return of capital entry.
Enter capital gain distributions for the LTCG and STCG.
Enter a smaller Return of capital for the remainder of the cash received.
Enter the actual merger transaction
The capital gain realized is limited to the actual cash received so some clubs may need to adjust the capital gain amounts before entering the capital gain distributions. Instructions for doing this are included. The total merger consideration is $29.8703 per PAS share. Your capital gain will be based on this total consideration with a limit that the total capital gain can not be more than the total cash received. The total consideration was calculated as follows;
Cash portion: 28.50 x .494 = $13.7712
Stock portion: .504 x .5022 x 62.03 = 16.0991
Total = 16.0991 + 13.7712 = 29.8703

1. Calculate the capital gain.
The total merger consideration is $29.8703 per PAS share. This is $16.0991 in Pepsi shares and 13.771 in cash. Calculate the total value received for your PAS shares by multiplying 29.8703 by the total shares of PAS.
Total Proceeds = [29.8703 x (# of PAS shares owned)] – (Reorganization fee)
Enter the total proceeds amount in the dividend entry screen. Change the “type” to Return of capital. Date the transaction 2/25/2010. The security is PAS. Save the transaction.
The program will change some of the Return of capital, if appropriate, to LTCG and STCG.
Look at your transactions history and WRITE DOWN the amount for LTCG and STCG.
After you have recorded these amounts you can delete the Return of capital transaction. Although the LTCG and STCG entries were generated by the Return of capital entry you may need to delete them separately in the program.

Next you need to compare the sum of the capital gains to the total cash received, excluding cash for fractional shares.
The total cash received should be approximately:
[13.7712 x (# of PAS shares held)] – (Reorganization fee).
Check your broker statement for the exact amount.
If your total capital gains are less than or equal to the total cash received skip to the next section, Accounting for Cash Received.
If your total capital gains are greater than the total cash received, continue in this section to adjust your capital gains so they are equal to your total cash received.
Since the structuring of this merger limits your capital gains to the cash received you need to adjust your gains downward. This will be done by calculating the total decrease needed and the apportioning the decrease to the LTCG and STCG according to each type’s share of the total calculated capital gains. Here are the items that need to be calculated first.
Total Capital gain = Total CG = LTCG + STCG
Total Decrease = (LTCG + STCG) – (Total cash received)
% LTCG = LTCG/ (LTCG + STCG)
% STCG = STCG/(LTCG + STCG)
With these calculated you can calculate the final LTCG and final STCG.
Final LTCG = LTCG – [(Total Decrease) x (% LTCG)]
Final STCG = STCG – [(Total Decrease) x (% STCG)]
If you have done the calculations correctly, (Final LTCG + Final STCG) = Total cash received.
If , (Final LTCG + Final STCG) = Total cash received, go to the next section, Accounting for Cash Received.

2. Accounting for Cash Received
All of the following entries use the cash dividend screen, in CA3 this is Transactions > Cash Dividend or Distribution, and online at Accounting > Cash Dividends.
Date these transactions 2/25/2010.
The security should be PAS
Change the “type” field to Long-term capital gain.
Amount should be your LTCG as calculated above.
Next repeat the process for your short-term capital gain.
Change the “type” field to Short-term capital gain.
Amount should be your STCG as calculated above.
If you had to adjust you capital gain, the amount of LTCG and STCG in these entries will be the actual LTCG and actual STCG as adjusted above.
Finally, enter a return of capital entry.
Change the “type” field to Return of capital.
Amount should be: (Total Cash received) – ( LTCG + STCG)
If your LTCG + STCG = Total Cash Received, no return of capital entry is needed.
Continue to step 3, The Merger.

3. The Merger
Go to Transactions > Merger or Accounting > Securities > Record merger of securities depending on the version of the software being used. If you are unfamiliar with merger transactions you can get help at this url: http://www.iclub.com/support/kb/default.asp?page=normal_merger

Here is the information you need to complete the merger.
Date: 2/26/2010
Old Security or Merging Company: PAS
Price per share of old Security / PAS: 28.50
Cash received: See your broker statement for cash-in-lieu
New Security: Pepsi (PEP)
Shares received: (#of PAS shares owned) x .25954
(You are receiving .5022 shares of PEP for each remaining 51.68% of PAS shares not exchanged for cash.)
Remember to include fractional shares. Save the transaction and this is finally done.
A worksheet is provided below to record the items that need to be calculated.

A. Total Proceeds received.
29.8703 x (# of PAS shares) = ¬¬¬¬¬¬¬¬¬¬¬¬¬¬¬¬¬¬¬¬¬¬¬¬____________________________

B. Total cash received.
[13.7712 x (# of PAS shares)] – ( Reorganization fee, if any) = ________________

Large Return of Capital (ROC) entry amount is equal to A.
C. LTCG = _____________________ (see transaction list after large ROC entry, record here)
D. STCG = ____________________ (see transaction list after large ROC entry, record here)
E. LTCG + STCG = __________________ . Is this greater than B, Total cash received?
F. Return of Capital amount = (Total Cash Received) – (LTCG + STCG) = ______________
This is if LTCG + STCG is less than Total Cash received.

Capital gain adjustment, if LTCG + STCG is greater than Total Cash received.
G. Total Decrease = (LTCG + STCG) – (Total Cash Received) = __________________
H. % LTCG = (LTCG)/ (LTCG + STCG) = _________________
I. % STCG = (STCG)/ (LTCG + STCG) = _________________
J. Actual LTCG = LTCG – [(Total decrease) x (%LTCG)] = ________________________.
This is the amount to enter if LTCG + STCG is greater than Total Cash received.

K. Actual STCG = STCG – [(Total decrease) x (%STCG)] = ________________________.
This is the amount to enter if LTCG + STCG is greater than Total Cash received.

L. Shares of Pepsi Received = .25954 x (# of PAS shares owned) = _________________.
(For the merger transaction)