PepsiCo hears banker break-up pitches

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PepsiCo (NYSE: PEP) has been listening to financial advisors pitch proposals that recommend the break-up the company, several industry bankers told dealReporter.

There have been multiple sellside analyst reports ruminating on whether PepsiCo will pursue this strategy in the wake of Kraft Foods’ August announcement that it was separating its Global Snacks and North American Grocery businesses.

More than half-a-dozen bankers interviewed by this news service said that separating PepsiCo’s beverage and snack food businesses was either a feasible outcome or a good business strategy. But many caveated these views by pointing out that it would be difficult to predict when PepsiCo might pursue such a transaction.

A spokesperson for PepsiCo said, “We have not changed our point of view on PepsiCo’s current portfolio or strategy, and we continue to see very attractive opportunities in our global snacks and beverages businesses.” The Purchase, New York-based multinational has long touted its “power of one” strategy of owning both businesses.

PepsiCo announced on Wednesday that it had moved Frito-Lay North America CEO Al Carey over to the beverage business and brought in Tom Greco, chief commercial officer from the Pepsi Beverages Company, as the new head of Frito-Lay.

The idea of a PepsiCo break-up has been around for a while, both in the minds of the sellside community, as well as the bankers that have visited the company. One of the bankers said that “so many” of his peers had pitched the spin-off idea to the board in the past that he believed it was no longer an “if” question, but a “when.”

Some of the bankers claimed a split announcement could come as early as this year, others said after the Kraft Global Snacks business had traded for a couple of quarters, and still others said PepsiCo would wait and see how the Kraft split panned out before embarking on their own separation. Kraft has said it hopes to complete its break-up before the end of 2012.

One banker said that a catalyst for a PepsiCo break-up could be if investors start to pressure CEO Indra Nooyi to produce better results. Kraft’s CEO, Irene Rosenfeld, faced continuous pressure from two activist shareholders, Bill Ackman’s Pershing Square and Nelson Peltz’s Trian Fund. There are no 13-D filers in PepsiCo’s stock.

PepsiCo is down 5.6% for the year compared to a 6.4% gain for chief competitor Coca-Cola (NYSE:KO) and a 6.6% gain for Dr Pepper Snapple Group (NYSE:DPS). Goldman Sachs analysts have praised Atlanta-based Coca-Cola for its EPS growth outlook and momentum in its global growth.

PepsiCo lowered its earnings guidance when it reported 2Q11 results that showed US sales volumes declined by 1% for the beverages unit. CFO Hugh Johnston told investors in early September that PepsiCo sees the potential for a “ stagflationary” environment in developed economies and faces challenges in pricing its beverages.

Another theory on the catalyst for Nooyi to split up PepsiCo is her personal ambition, the bankers said. Several bankers said the 55 year-old executive may want to pursue a legacy-making deal.

As a first move to pursuing a large deal, PepsiCo could look to separate its beverages unit from its snack business, some of the bankers said. Other bankers said PepsiCo’s “power of one” approach would be lost if beverages and snacks were separated.

PepsiCo has said that it is able to leverage the ownership of a food and beverage portfolio when it sells to retailers. But one of the bankers said that like in the case of Kraft’s two units, PepsiCo’s beverage and snacks businesses use different distribution systems so there are limited synergies in owning both.

No matter the deal structure, one legacy deal for PepsiCo would be to acquire the independent Kraft Global Snacks business in the future, which has annual revenue of approximately USD 32bn. This would create the largest snacks company in the world, bankers said. Frito-Lay’s North America revenue was USD 13.4bn in 2010 and the Latin American Foods business contributed another USD 6.3bn in revenue.

Bankers were conflicted on whether there would be antitrust issues with a deal between PepsiCo and Kraft’s Global Snacks business. In PepsiCo’s most recent 10-K, the company said it accounted for 39% of the US savory snacks business and estimated the Kraft savory snacks business as having a 9% market share.

On the surface, the deal would merge the number one and number two savory snacks companies. But one of the bankers pointed out that granular market definitions, at least in the US, would play a big role.

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