The cola war between the nation's soft drink sales leaders, heralded by their battle cries of "Take the Pepsi Challenge" and "Coke, It's the Real Thing," entered the trenches two weeks ago. What had been a slugging match with one-upmanship in advertising and price promotions for the past few years has become a bloody antitrust case in the U.S. District Court for Eastern Virginia.
Sometime during the next couple of weeks, two swarms of New York lawyers will finish parading their Wall Street analysts and big-name professors with charts and graphs into federal court, and a jury of plain folks probably will go with their guts deciding on the machinations of corporate giants.
Allegheny Pepsi Bottling Co., the Baltimore-based franchise, charged that Coca-Cola Bottling Co. entered into a conspiracy with other corporate giants, including Citicorp Venture Capital, to monopolize the regional soft-drink market. Allegheny is seeking $65 million in damages.
Allegheny opened on Nov. 2, with what attorney Harvey D. Myerson called the "guts" of its case, introducing into evidence internal memorandums obtained from Coca-Cola in pretrial discovery. The memorandums, reaching as high as a senior vice president, purportedly showed that Coca-Cola executives conspired with an investment manager at Citicorp Venture Capital to bankroll a dummy corporation and under-price Pepsi in this region.
And further, Myerson said in his opening remarks, the monopoly was to secretly remain in Coca-Cola's control as "an attractive bottling franchise" to be sold later to its retiring board chairman, J. Paul Austin.
Coca-Cola has argued that Allegheny has enjoyed record profits since July 1980, when the Coca-Cola franchise, Richmond-based Mid-Atlantic Bottling Co., began operation. Mid-Atlantic's Norfolk attorney, William T. Prince, told the 10 jurors, four of them alternates, that Allegheny's business was "so outstanding that the company increased the salary of the chairman of the board, Morton M. Lapides, from $315,000 to $450,000 this year, plus a possible bonus of $225,000.
"That shows that this year, the year his company is being driven out of business, he will probably make $675,000."
To win the antitrust case, Allegheny must prove the conspiracy and show damage under the Sherman Antitrust Act.
Allegheny completed its case last Wednesday. Coca-Cola has listed about 50 potential witnesses for its presentation, which is expected to last two weeks and will include testimony by Alfred E. Kahn, economics professor at Cornell University and former chairman of President Carter's Council on Wage and Price Stability and his chief inflation fighter.
Coca-Cola had asked for a directed verdict from Judge John A. MacKenzie, claiming Allegheny's evidence was insufficient. MacKenzie denied that motion.
In addition to Coca-Cola and Mid-Atlantic, the suit names the Richmond franchise owners, Frank A. Grisanti and Andrew Galef, and their holding company, Bottling Management Inc. The original complaint, filed in November 1980, named as investors in the creation of Mid-Atlantic the Prudential Insurance Co., the Teachers Insurance and Annuities Association and two executives of the American Express Co.
Myerson told the jury that Coca-Cola memorandums reveal a strategy for the secret acquisition of the J. E. Crass Bottling Companies, an independent Richmond-based Coca-Cola bottler, which was combined with Coca-Cola's Baltimore subsidiary, the Coca-Cola Bottling Co. of Baltimore, in a sale to Mid-Atlantic.
The memorandums detail a discussion between Andrew S. Christon, an executive in the bottler financial analysis division of Coca-Cola in Atlanta, and Leonard Shaykin, an investment manager with Citicorp Venture Capital.
The following are excerpts from Christon's memorandum of Aug. 9, 1979, to a senior vice president in his division, Lawrence R. Cowart:
* Christon and Shaykin discussed a meeting "to explore, in an informal and noncommittal discussion, the possibility of 'parking' the Crass deal over a period of 12 months. . . . He[Shaykin]implied that it could be done, and that he understood perfectly our purpose and strategy."
Myerson, with a New York law firm, told the jury that the "parking" deal meant the company would be run by interim "owners" who would give back the bottling franchise when Coca-Cola asked them to. Galef and Grisanti have been portrayed in court by Allegheny, and by financial analysts retained by the firm for testimony, as "turnaround managers" who had no experience in the bottling business.
* In a postscript, Christon wrote that Shaykin "has already talked to legal and has contacted a group of investors he called 'interim holders of Companies.' He stated that the group would give instant credibility to the deal. . . . These investors are more than caretakers, they will watch carefully. Most importantly, they will do what we say."
Myerson did not mention in court that the memorandum also contained Christon's observation that if Galef and Grisanti made the business profitable, and did not want to give it up, there would be no problem because it would be profitable for Coca-Cola and all investors. In its final pretrial paper, Allegheny maintained that the allegations about Mid-Atlantic being set up as a retirement benefit for Austin have "generated so much embarrassment" that that part of the deal was scrubbed.
* Myerson apparently will key on a later memorandum by Christon, which notes that: "In 'x' period of time, Mr. 'X' will have the right to purchase the business at 'x' price." Christon went on to write that Shaykin "does not see any need for anyone high up in Citicorp to be contacted by Paul Austin in regards to the project."
* In an Aug. 17, memorandum, Christon told Cowart that "according to Leonard[Shaykin], the parking concept has never been done before. If we can do it, it will result in an off-balance sheet financing for execution of our business strategy. . . . In Leonard's view, the agreement of Galef and Grisanti to act as parking lot attendants and move out when the job is done will stand on a handshake from Galef and Grisanti."
Coca-Cola's lead attorney, Mark A. Belnick of New York, described Christon as "a very junior executive," and told the jury that Coca-Cola's senior executives will testify about the acquisition of Crass, which he described as "perfectly legal."
Coca-Cola has argued that the new franchise simply infused competition into what Belnick called a "complacent" pricing system in the region, and that Allegheny was angry at having to compete.
Coca-Cola entered numerous documents obtained in pretrial discovery, including company newsletters, press releases and letters from Allegheny to its auditing firm, which purportedly show Allegheny made record profits in 1981. Presenting a month-by-month breakdown for a complete fiscal year, Coca-Cola's attorneys told the jurors that Allegheny made more than $16 million in profits before taxes, higher than the previous year, at a time when the firm claims it was being driven out of business.
Lapides testified that these profits would have been as much as $20 million if Mid-Atlantic had not engaged in "predatory pricing."
Allegheny Pepsi is a subsidiary of Allegheny Beverage Corp., which also owns a small soft-drink equipment retooling plant in Georgia and merged in January 1981 with the Macke Co. With sales of $425 million this year, since acquiring Macke, Allegheny Beverage is close to the Fortune 500 list of the nation's largest producing companies. As a diversified manufacturer, Allegheny Beverage also draws revenue from other businesses, including vending food services, building maintenance and services, coin-operated laundries and a furniture showroom chain.
Testimony indicated Allegheny Beverage expects sales of $1 billion yearly within the next decade.
Lapides testified that despite an expected population decline in this country, the beverage business should grow because per capita consumption of soft drinks probably will continue to rise and the human life span continues to lengthen.
Allegheny and Mid-Atlantic compete primarily in parts of Virginia, Maryland, West Virginia and Pennsylvania. This is one of the few regions where Pepsi and Coca-Cola have a near-even market share in the "take home" business, testimony has indicated. Coca-Cola has remained dominant in "cold" sales, fountain and machine trade wherever the beverages compete.
Asked if Allegheny hadn't made more profits in 1981 than in the previous year, Lapides testified "No, that's incorrect. Actually, Allegheny Pepsi, comparing apples with apples, equalizing the interest on debt , actually is making less."
Lapides, whose testimony and cross-examination took most of two days, told the jury that in one instance Coca-Cola cut prices to $3.50 and $4 a case for retailers, while the Pepsi bottler could not sell for less than $7.50. "I'm not saying I'm in a dire situation," he testified. "I'm operating at a profit, but at a lesser profit."
Asked by Prince how long it would be before his company is driven out of business, Lapides remarked, "one month, two months or 10 years." Lapides admitted on cross-examination, over the objection of Myerson, that just two months ago he purchased $400,000 worth of Allegheny Beverage stock, and he owns 30 percent or controlling interest of common and preferred stock.
An accountant retained by Allegheny to analyze Mid-Atlantic pricing testified that, using all of the firm's costs, he determined the beverages were priced at the low cost more than 70 percent of the time from October 1980 through March 1981. Even using an accounting formula more favorable to Mid-Atlantic's contentions, H. Leon Hodges, a certified public accountant from Chesapeake, told the jury, the beverages were priced below cost at least 49 percent of the time.
According to Allegheny financial reports entered as evidence by Coca-Cola, Allegheny in mid-1979, before the creation of Mid-Atlantic, ended five years of price promotions used in competition against Crass and raised prices to increase profits. During the same period, Coca-Cola pointed out, relying on a deposition from Crass' former owner, Peyton Pollard, Crass increased its prices to raise profits so the firm would look better to potential buyers.
One of Allegheny's primary contentions is that Mid-Atlantic received a sweetheart financing package in the deal for Crass and Baltimore Coke. To set up Mid-Atlantic, Myerson argued, Coca-Cola provided a "deep pocket" that allowed Galef and Grisanti to skip payment on a $21 million junior subordinated loan for three years with no reduction of principal for 10 years. The deal included syrup rebates that Allegheny claims were out of line with those Coca-Cola provides other bottlers. A specialist in antitrust economics, Alan R. Beckenstein, a professor at the University of Virginia's Colgate Darden Graduate School of Business, testified that the financing "damaged" Allegheny's position in the market because it was "predatory." Under cross-examination by Stuart Robinowitz, of Belnick's law firm, Beckenstein admitted he had not done an independent study of the transaction, but relied on a study conducted by another Allegheny witness, James B. Dwyer, an analyst with the Wall Street investment banking firm of Donaldson Lufkin & Jenrette. Beckenstein said that Allegheny did not have to lose all its profits to prove "predation."
Judge MacKenzie would not permit Beckenstein to tell the jury the amounts of monetary damage he believes the deal caused, but permitted it for the record, for possible appeals, with the jury out of the courtroom.
Beckenstein said he believes that $45 million, cited in earlier testimony by Dwyer as "an imprudent economic transfer" by Coca-Cola through syrup rebates, is an appropriate figure for damages. Any damages the jury might award, in an antitrust matter, can be tripled by the judge.
Coca-Cola has argued that the financing deal was sweetened to get Mid-Atlantic to sign an amended bottler contract, which gives the company pricing flexibility on its syrup. About two-thirds of Coca-Cola's sales are to independent franchises, testimony indicated, and a changeover from the old contract, in effect since 1921, has been the company's primary concern recently.