Pressure on PepsiCo to split into two increases
It ’s a cruel world. Because PepsiCo, the company that unites a snacks and a soft drinks business under its roof, has for the past five years underperformed in stock price, operating margins and earnings growth compared with its peers, an “activist” investor in PepsiCo, Nelson Peltz, on 20 February 2014 sent a letter to its board that once again put pressure on the company to consider a spinoff of its beverage business.
Mr Peltz ’s firm, Trian Fund Management, said it owns about USD 1.2 billion worth of PepsiCo ’s stock. Trian, in true “activist” style (also termed rabble-rousing) only began to amass a stake in PepsiCo last year with a view to initiate a split of the company into two. Trian is convinced that the snacks business would be better off on its own as the performance of the soft drinks side of PepsiCo has proven lacklustre.
Following Trian ’s initial attack on PepsiCo ’s integrity, the beverage and snacks giant subsequently launched a strategic review of the company. In February 2014, the maker of Lays and Doritos chips said it had consulted with bankers and opted against spinning off the North American beverage unit.
In its response to the review, which was, of course, widely distributed to the financial media, Trian said it was “highly disappointed” with PepsiCo ’s decision and will soon begin to meet with shareholders to create “a groundswell of support” for a split.
“Trian does not agree with the outcome of PepsiCo ’s strategic review, particularly following another quarter of uninspiring performance and weak 2014 guidance,” Mr Peltz wrote.
PepsiCo ’s beverage unit, which includes the Gatorade and Tropicana brands, has struggled to keep up the pace as consumers increasingly choose juices and other soft drinks over sodas. PepsiCo reported on 14 February 2014 a better-than-expected profit of USD 1.74 billion for the fourth quarter 2013. However, revenue from the Americas beverage segment dropped 1.6 percent, while foods revenue was up 3 percent.
PepsiCo also detailed plans to increase cash returns to shareholders by 35 percent to USD 8.7 billion in fiscal 2014, utilising share buybacks and higher dividends.
A separation of Pepsi ’s North American beverage and snack businesses, Mr Peltz maintained, “would create two leaner and more entrepreneurial companies.”
“A stand-alone snacks business would offer investors strong growth in sales, margins and free cash flow generation, and a stand-alone beverage business would provide strong, stable free cash flow that may be optimised through an effective balance sheet and capital return program,” he added.
Mr Peltz previously wanted Pepsi to consider an acquisition of Mondelez International, a snacks business that was spun off from Kraft Foods in 2012. But Mr Peltz abandoned that idea after he got a seat on the Mondelez board in January.
At the moment, PepsiCo ’s investors seem to be divided on the issue of a split. On 3 March 2014 media reported that only a slim majority (55 percent) of institutional investors in PepsiCo support a split, according to a Wall Street survey conducted by Bernstein Research. The pro-split faction received some flak from investor Warren Buffett (a major shareholder in Coca-Cola), who said in an interview of the same day: “I don ’t think if I owned Pepsi – if I was the only holder of it or my family was the only holder of it – I don ’t think I ’d split it up. I think that Frito-Lay is an extremely good business, it ’s a better business than the soft drink business, but I think the soft drink business is a good business, too and I don ’t see any reason to split them up.”
Mr Buffett ’s words may carry some weight with investors, but likewise Mr Peltz is not known for giving up on a plan easily.
