Focus - What's Eating PepsiCo?

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PepsiCo's CEO, Indra Nooyi, is under pressure; the group's strategic review has been extended and, this week, talk of a business split has been fuelled by the arrival of activist investor Nelson Peltz. So, asks Michelle Russell, what's eating PepsiCo?


PepsiCo has had perhaps more than its fair share of headlines over the last few weeks, and a fair amount of them make difficult reading. 

Last week's positive news on the sale of its bottling operations in China to Tingyi, in exchange for a stake in the noodle and soft drinks maker's business, was overshadowed by speculation that the company's board are unhappy with the current leadership. Specifically, it is reported that the board is unhappy with CEO Indra Nooyi's performance.

According to the New York Post, some members of PepsiCo's board are frustrated at the group's flat stocks and a less-than-successful push into healthier snacks and beverages. 

There is evidence that the unrest may stretch beyond the boardroom.

In September, Sanford Bernstein surveyed 70 institutional investors, asking for their views on the PepsiCo business. The analysts received 144 "negative/critical" comments - less than half were positive - and while praiseworthy of the firm's snacks business, investors were most critical of PepsiCo's management and drinks unit. Those surveyed offered derisive comments such as "weak, stubborn, lost and over-hyped". Four explicitly called for a management/CEO change, according to Bernstein.

This week, Stifel Nicolaus analysts Mark Swartzberg and Aashiv Shah echoed this sentiment. "Our view has been that PepsiCo is being ineffectively managed, undermining the opportunity for investors to participate in intrinsic value," the analysts said. "Various sum-of-the-parts scenarios point to potentially significant unrealised intrinsic value."

Amid all of this, CEO Indra Nooyi used an interview last week to challenge many businesses for spending too much time worrying about a "narrow group of shareholders". Was this an purposeful rebuke to forces within her own company?

Commenting on the motivation behind the firm's 'Performance with Purpose' vision, Nooyi said: "There is more to a company than just a shareholder. There's a multiplicity of stakeholders and you've got to worry about all of them, because when you worry about today and just the shareholder, you don't want to add cost to society that somebody else has to clean up."

Nooyi has been at the helm of PepsiCo since 2006 and has overseen a push into healthier products across both its snacks and drinks divisions. The CEO has also pledged to more than double sales from such items, which include Tropicana orange juice and Quaker oatmeal, to $30bn by 2020.

The push, however, has attracted criticism from some industry observers who say it has distracted her from turning around the core soft drink business, which has suffered, particularly in North America.

PepsiCo's share price is up by 5% from five years ago, when Nooyi took the CEO seat, at $64.50. Given the global economic downturn, one could argue that the performance is not shocking, and PepsiCo's stock is outperforming the S&P 500, which is currently trading around 0.25% lower than five years ago. However, the group has lost ground to The Coca-Cola Co over that period. Coca-Cola stands at around $68, having reformed its business and upped its share price by around 43% since 2006. That's going to hurt in the blue corner of soft drinks.

If we take a look back to 2010, PepsiCo recorded a 6% increase in profits for the full year, albeit boosted by the bottler acquisitions earlier in the year. In 2011, net profits were flat in the first-half and have showed some improvement in the third quarter, climbing by 4%, driven by top-line gains in both its snacks and drinks divisions.

Investors, however, are concerned for the future direction of the group. Bernstein Research analyst Ali Dibadj believes that recent financial results and "disappointments by the company" would suggest that Nooyi is indeed under pressure.

"Any sensible board would be asking questions," Dibadj told just-drinks. "Our belief is that the delay of the company's business review is driven by a harder look at understanding what spending the company has to make to right their business and what levers they can pull from a cost-cutting perspective to get there."

Last week, PepsiCo delayed publication of a review of its business plan for 2012 "and beyond". The company did not give a reason for the delay in publication, which had been expected in December.

Even if the board does want to move against Nooyi, though, there is the question of who might take her place. Dibadj said that there is no obvious successor, internally, given that the only potential candidate, Pepsi Beverages Co's CEO, Eric Foss, is set to leave the company next month.

"The [internal] bench is strong, but somewhat green still to take over as CEO, if needed," Dibadj told just-drinks. "The company typically goes inside, but there are a number of outsiders who would fit the bill too." He declined to provide any names.

Aside from a potential change of CEO, another outlet for investor unrest has proved to be speculation about a PepsiCo split, in the vein of that orchestrated by Kraft Foods this year. PepsiCo has been forced to publicly deny that this is an option. 

The group has formed 'The Power of One - Americas Council' to take advantage of the combined scale of PepsiCo's food and beverage businesses, which resulted in the formation of a Global Snacks Group, in a bid to improve the way it develops new products around the world.

While the announcement appeared to be a vote of confidence for North America at a time of macroeconomic weakness, the move only served to fuel split reports.

Bernstein analysts, and most investors, have often discussed PepsiCo as a "tale of two companies" - snacks and beverages.

Every move the company now makes is likely to be linked to a potential split or the idea that there is internal unrest at blue HQ. The fire of speculation has only been stoked further by news this week that Nelson Peltz has purchased US$146m-worth of PepsiCo shares.

The billionaire activist investor's fund purchased 2.36m shares, representing 0.15% of PepsiCo's outstanding shares. Peltz's Trian Fund Management also holds stakes in Kraft Foods and Heinz.

Swartzberg and Shah said Peltz's involvement may help to unlock the "intrinsic value" that many investors see in PepsiCo. "As for how, we think there are a number of options," the analysts said, "including scenarios that leave PepsiCo as one company and improve a) its US beverage strategy and execution while also b) restoring capital discipline in investing for future growth, especially outside the US."

Nonetheless, the analysts also said that there is merit to a break-up of the firm's food and beverage divisions.

Talk of a split is unlikely to subside any time soon. Once the ball is rolling in investor circles, it can sometimes prove tough to stop. PepsiCo could be in for a tumultuous few months.

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