As crusading investor Nelson Peltz lets off another bomb in the Pepsi boardroom – this time in the form of a 37-page letter criticizing the firm’s snack/soda integration – we examine the arguments for and against any split.
Peltz’s Trian Fund Management claims to own $1.2bn of PepsiCo stock and told the company Wednesday that he plans to meet shareholders to agitate for a spin-off the company’s beverage business.
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NELSON PELTZ (July 2013 Trian Partners report pressing for split):‘PepsiCo has struggled managing two fundamentally different businesses’
- Beverages ($33bn revenue, $3.9bn EBIT, 2013 estimate) are under-invested in and have been forced to play ‘second fiddle’ to support snacks ($35bn revenue/$6.3bn EBIT, estimate.)
- Snacks were then pushed to over-earn to support reinvestment in beverages.
- Advertising spend as a % of sales has fallen and trails peers Dr Pepper Snapple and Coke.
- Beverage JVs in key growth markets offset earning pressures but are ‘questionable long-term decisions’: Taking Wimm-Bill-Dann alone in Russia, Pepsi overpaid ($5bn) for exposure to ‘perhaps the riskiest emerging market’, while an ill-advised push into health & wellness spurred that purchase.
- Pepsi has problems retaining managerial talent, particularly in beverages.
- Snacks valuation clouded by beverage weakness: snacks began trading at a premium in early 2000s.
- Earnings Per Share (EPS) growth trails peer group.
BOTTOM LINE: “Ten years into the ‘Power of One’ it has yielded…a dominance of snack-minded management in charge of execution. The merchandising benefits of ‘Power of One’ will not offset the cultural handicaps it seems to be imposing on the beverage unit.”
“A turnaround of the North American beverage business is never going to happen if soft drinks and snacks are not properly managed for their increasingly different strategic and cultural needs.”
The ‘Power of One – Americas Council’ announced last July included just two native beverage executives but six on the snacks side, Trian Partners notes, with the body’s very existence underlying management’s belief that snack and beverage buying and consumption commonly occur at the same time.
“We do not entirely agree with this view and respectfully question how this perspective will help to decommoditize Pepsi’s core beverage brands and reactivate the category’s growth. A great many of the occasions for snacks and soft drinks do not easily match,” Peltz’s Trian writes.
“The unintended message that may be getting sent…by the snack heavy leadership is that any talented individual who wants to rise through the beverage ranks must flow through the food business at some point.”
PELTZ’ FAVORED SOLUTIONS:
- Merge with Mondelez, use acquisition as a catalyst to separate beverages. “A bold, transformative transaction that creates the global snacks leader with potential for up to $6bn in cost and revenue synergies.”
- Separate snacks and beverages (the global beverage business and not just PepsiCo Americas Beverages alone) into two standalone, pure play companies that retain their global brands.
INDRA NOOYI (February 13, 2014, Q4 2013 earnings call): ‘PepsiCo’s ownership of North American beverages maximises shareholder value’
- We used the best bankers and consultants, and after an exhaustive analysis concluded that North American Beverages creates value and is optimized within PepsiCo’s structure today.
BOTTOM LINE: “Any structural separation would…result in loss of significant synergies, both between snacks and beverages in North America and between North American beverages and the balance of our international operations.”
“It would significantly decrease our relevance to US retailers and jeopardize our ability to grow in foodservice…make our remaining international beverage business less competitive and…forfeit the potential value creation of investments we’ve made in sweetener technologies, the full benefits realization of our A&M investment and year-end productivity savings,” Nooyi added.