NEW YORK — Stating that PepsiCo, Inc. is at a “strategic crossroads” and that the “status quo is unsustainable,” the investment firm Trian Fund Management L.P., which owns 1.3 billion shares of PepsiCo stock, has published a white paper that outlines two strategic alternatives PepsiCo’s management may adopt in an effort to improve shareholder value. The options include breaking up the company to create two pure play beverage and snack food companies or merging with Mondelēz International to create a global snack food company and spinning off the beverage business.
“Trian believes PepsiCo is at a strategic crossroads as secular forces ranging from changing consumer tastes to the increased importance of emerging markets have changed the outlook for its key businesses,” the investment firm said. “Trian believes PepsiCo’s current structure is increasingly unmanageable. While it has a leading portfolio of 22 billion-dollar brands, PepsiCo has underperformed its peers as it grapples with the differing needs of its fast-growth (snacks) and slow-growth (beverages) businesses and the resulting inherent conflict in allocating its resources.”
PepsiCo did not respond to a request for a comment on Trian’s recommendations.
The investment firm also expressed doubts about PepsiCo’s current strategy, which involves an increased advertising spend, the hope of disruptive carbonated soft drink products, and productivity initiatives that have yet to hit PepsiCo’s bottom line, and said all three strategic efforts are unlikely to be game-changers long term.
Trian said it is making its recommendations “in the spirit of open and constructive dialogue with all shareholders.”
By merging PepsiCo with Mondelēz International and eventually spinning off PepsiCo’s beverage, Trian said the resulting company would be a leading global snacks company with one of the most valuable brand portfolios in the world.
“This approach would create substantial cost and revenue synergies and the opportunity for margin and capital structure efficiencies,” Trian said. “With substantial overlap between PepsiCo’s and Mondelēz’s largest shareholders, both companies’ shareholders would benefit, with Trian estimating this combination could lead to approximately $175 of implied value per PepsiCo share and approximately $72 of implied value per Mondelēz share, by the end of 2015.
“While Trian believes this strategic alternative creates the most value for shareholders, PepsiCo has indicated that it is not inclined to pursue a Mondelēz transaction, although we disagree with their rationale. As a ‘constructivist’ investor, we also understand a company cannot be compelled to complete a transformational merger but we hope they will reconsider their position.”
If the Mondelēz idea is off the table, Trian’s second recommendation is to separate PepsiCo’s snacks and beverages business. The investment firm said such a strategic move would create a focused leader in the snacks category that would deliver attractive growth and productivity initiatives that would hit the bottom line.
“We believe it will also create a beverages leader whose trading multiple will be re-rated as it combines an efficient capital structure, high dividend and operational improvements to unlock value,” the investment firm said. “Trian believes this strategic alternative could lead to approximately $136 to $144 of implied value per share by the end of 2015, while preserving the possibility of a strategic transaction in the future, which could create additional value.”
This is not the first time calls have been issued for PepsiCo to consider breaking up. In late 2011, as companies such as Kraft Foods, Sara Lee and Ralcorp Holdings were initiating plans to separate their businesses in an effort to maximize shareholder value, there was speculation PepsiCo would be the next company to join the list.
But Indra Nooyi, the chairman and chief executive officer, said the company is on the right track with its snack and beverage businesses combined. She noted that PepsiCo was created as an integrated snack and beverage business, and that its success is tied to that combination.