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Analysis - PepsiCo stays true to beverage, snacks union

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PepsiCo brought to a close one of the more disruptive chapters in its recent history yesterday, when, in its full-year results, it said it would not be splitting its stagnant North American Beverage (NAB) business from its fast-growing snacks units.

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The announcement, backed up later by CEO Indra Nooyi in a post-results conference call, ended activist investor Nelson Peltz's attempts to force a division. Since last spring, Peltz has been canvassing fellow investors to back a PepsiCo merger with snacks rival Modelez International. That move was put on ice last month, when Peltz announced he was to take a seat on Mondelez's board and halt his agitation for a merger.

However, his attempts to split PepsiCo's NAB and snacks units, which he claims will create additional value for both units, continued - until now.

“We spent a whole year looking at this, and there isn’t a stone that we didn’t turn over,” Nooyi said yesterday. “At the end of the day, we concluded that long-term value is maximised with NAB (North American Beverages) staying in PepsiCo’s portfolio.”

The markets reacted unfavourably to the news, despite Nooyi's insistence that NAB is “too big a business, and too profitable a business” to let go. Share gains made over the past two weeks were wiped out yesterday, as the stock dipped 2%.

Analysts, however, are in favour of the move. Janney's Jonathan Feeney believes it “makes sense”, considering the sweetener innovations PepsiCo has lined up for launch this year. “Looking at the synergies between the businesses and valuation of comparable assets, we’re inclined to agree (with Nooyi),” says Feeney.

Meanwhile, Wells Fargo's Bonnie Herzog is pleased to hear that, on the day before St Valentine's Day, true commitment has won out. “PepsiCo sends divorce lawyers home - snack and beverages to stay married,” she wrote in a note.

“We believe this is the right decision,” Herzog added. “And, we are pleased that management is focussed as it recommits to proving that its strategic vision is the right one.”

But, while PepsiCo looks set to stay together - for now, at least – the company has poured cold water on any potential courting of Monster Beverage Corp. Speculation had mounted that PepsiCo would use the fast-growing energy drinks maker to plug gaps in its portfolio. However, management said its distribution deal with Rockstar, and the early successes of Mountain Dew Kickstart, meant it was not looking for any acquisitions in the energy category.

Nevertheless, Stifel analyst Mark Swartzberg “continues to view a Monster acquisition as a strong strategic move for the PepsiCo business”. He also believes that PepsiCo's out-of-hand dismissal of a buy could make it “easier for the Coca-Cola Co to acquire Monster without a bidding war, in our view”.

That alone could be enough to make PepsiCo reconsider.


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