Andy Morton

Comment - PepsiCo May Find Sweet Turns Sour Without Salt

By | 25 July 2013

PepsiCo released its first-half results today

PepsiCo released its first-half results today

Can salt and sweet be together?

That's the question hanging over investor Nelson Peltz's increasingly bold moves to get PepisCo to buy snacks and beverage rival Mondelez International. Peltz's answer to the question is a clear 'no', and he desperately wants PepsiCo to separate its flatlining beverage unit (sweet) from its fast-growth snacks business (salt). This, says canny investor Peltz, who pulled a similar move in 2005 with Cadbury Schweppes, could double PepsiCo's share price to US$175 by 2015. 

To push his proposal, Peltz's Trian Fund Management last week published an analysis laying out its strategy. More surprisingly, Peltz appeared at a CNBC conference where he told PepsiCo investors to barrack the company to back his plan.

“The CSD business is just not growing,” Peltz said. “It used to be phenomenal but now it's not growing.”

What really seemed to irk Peltz, however, was investors and analysts who continue to see PepsiCo as a beverage company, despite snacks comprising the lion's share of its business. Better, he says, for PepsiCo to move on from its previously core business, allowing it to focus where the real growth lies. 

PepsiCo, as Peltz himself acknowledged with slight understatement, “doesn't love the deal”. In a conference call today, PepsiCo CEO Indra Nooyi reiterated the company's stance that its strategy is working (shares are at an all-time high) and said she was confident it can create value as an integrated company.

Nooyi has found support in the past few weeks from a number of corners, including BlackRock, an investment vehicle with a 5% PepsiCo stake. In an interview with CNBC, BlackRock chairman and CEO Larry Fink said Trian has done a "good job finding value" but suggested its analysis took a short-term view of the company. "(CEO) Indra Nooyi has done a very good job of reorientating PepsiCo ... I question how [Trian's plan] would add long-term value.”

Stifel analyst Mark Swartzberg said last week that a splitting of PepsiCo's beverage and snacks business was more likely than Peltz's preferred option of a Mondelez buy but added that the carving up of the business is, in some respects, the one that PepsiCo is following anyway.

That line of thinking was given further credence today by Nooyi, who suggested that PepsiCo will announce a structural shakeup early next year. The company's Byzantine setup, which keeps beverages and snacks in the Americas apart but lumps the two together in other regions, has been a target of Peltz's fiercest criticism in the past few weeks, with the investor telling the CNBC conference “it just doesn't work any more”.

Elsewhere, he added: “We believe the status quo is unsustainable.”

It is too early to guess what changes Nooyi will implement, but any streamlining that puts clear distance between food and drink units will help to take away Peltz's biggest bargaining chip - what  Swartzberg delightfully dubbed “persuasion in the court of investor sentiment”.

So if PepsiCo doesn't want Mondelez, could rival the Coca-Cola Co step into the breach? CNBC host Jim Cramer seems to think so, investing a whole segment of his typically-charged Mad Money show last week in support of a deal. 

And as my just-food colleague Katy Askew pointed out yesterday, such a deal would make sense, allowing Coca-Cola to offset some of the weaknesses associated with being a pure-play CSD group, and giving Mondelez the chance to continue upping its overseas investment with the aid of Coca-Cola's strong distribution channels in markets like China.

PepsiCo, meanwhile, continues with its mix of sweet and salty, helped in part by a run of strong quarterly results, including today's first-half number. But separating beverages and snacks is an issue that is unlikely to go away, even if Peltz's gauntlet throwing is ultimately deflected.

Some commentators have accused PepsiCo of using cash generated by its snacks units to prop up beverage sales, with a high marketing spend and a few buoyant emerging markets the only things stopping overall drinks volumes plummeting. Others have noted that a hived-off drinks business would offer itself as a ripe takeover target, just as Cadbury Schweppes' drinks unit proved to be

So, perhaps the question should not be whether sweet and salt can be together, but whether sweet can survive without salt.

Expert analysis

Global Beer Tax Tables, 2012

This report covers 58 markets and comprises a series of tables covering taxation base, historical excise rates, legal controls and a calculation of the total taxation burden on beer.

Sectors: Company results, Mergers & acquisitions, Soft drinks

Companies: PepsiCo, Cadbury, Coca-Cola Co

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