November 16, 2011 1:30 pm

PepsiCo opening up to advice on alternatives, bankers say

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Pressure on PepsiCo (NYSE:PEP) is mounting following Nelson Peltz’s move to buy into the beleaguered beverage and snack giant, two industry bankers following the situation told dealReporter.

On Monday, Peltz’s Trian Fund Management disclosed a passive nearly USD 150m position in Purchase, New York-based PepsiCo, which has underperformed its competitors this year.

At this stage, advisory work is probably focused on helping PepsiCo prepare a defense strategy, said the first and second bankers. Centerview Partners has a close relationship with PepsiCo and is likely to snag an advisory role, said these bankers and a third industry banker.

PepsiCo and Centerview did not return requests for comment on Tuesday.

The first banker said there is room for additional advisors, especially a bank with a strong defense practice. Unlike in the case of activist Carl Icahn’s failed attempt to shake up Clorox (NYSE:CLX), there is ample opportunity to help PepsiCo improve its performance, the same banker said.

PepsiCo has held steadfast to its so-called Power of One strategy of owning both snack and beverage businesses. But earlier this month, it disclosed that it would extend an ongoing business plan review until 2012.

The company is likely to reach an internal decision by December, the second banker said.

A third banker commented that the company has lately almost been too quick to come to the defense of Power of One, which has come under fire from some sell-side analysts. The second banker said “the wind is changing” at PepsiCo, but the company’s board will need substantial help before it is willing to drastically adjust its strategy.

This news service reported in September that bankers have been pitching the company on various break-up scenarios, but a catalyst for a separation may only manifest if pressure from shareholders increases.

Under one scenario, PepsiCo CEO Indra Nooyi would take charge of the international business and internal candidates would run the American beverage and Power of One units, the second banker said. Currently, PepsiCo breaks out results for Americas food and beverage and combines both for international operations.

For the 36 weeks ending 3 September, PepsiCo reported USD 1.7bn in operating profits from international, USD 2.5bn from Americas beverage and USD 3.8bn from Americas food.

There continue to be questions about Nooyi’s future role at PepsiCo. Two of the bankers said the PepsiCo board is likely to review her position along with the broader review of the business.

Along with potential Peltz activism, Kraft Foods’s (NYSE:KFT) pending breakup will likely put additional pressure on Pepsi if the split proves successful, the third banker said. Kraft said in August it will split into Global Snacks and North American Grocery businesses.

As previously reported by this news service, rationale for the Kraft split was that the company’s two units rely on different distribution systems to deliver goods to retailers. PepsiCo also relies on two distribution methods, but it has claimed that selling snacks and beverages gives it additional leverage.

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