Grab some chips and a soda, and settle in. This will be fun to watch. Nelson Peltz, head of Trian Partners, made a detailed case for a split of PepsiCo’s beverage and snack businesses on Wednesday. His arguments have merit, but leave room for Pepsi’s management – which has rejected the idea so far – to mount a feisty defence.
Mr Peltz argues that the drinks and snacks businesses have different distribution, strategic imperatives and financial profiles. The resulting conflicts have prevented growth and returns at Pepsi from matching peers’. Management has underinvested in beverages in order to siphon capital to the snacks. And the company does not get the premium that a standalone growth business (snacks) or a dividend-paying value play (drinks) would.
Focus helps. But the disparity between Pepsi’s performance and valuation and that of the peers Mr Peltz selects – Coca Cola, Dr Pepper Snapple, Hershey, Mead Johnson and McCormick, among others – could be due to Pepsi’s structural problems, or to differences in, for example, product mix. It is hard to say. The comparisons on the food side are unsatisfying. Hershey, Mead and McCormick make candy, baby formula and spices, respectively. Pepsi sells chips and cereal.
It is also uncertain that the companies would get much of a valuation boost. Would the beverage company trade like Coca-Cola’s, with its advantages of scale and brand? Would the snacks business, which had organic volume growth of 4.5 per cent last year, get a significant growth premium? Hershey, which grows faster, gets only a small premium to Pepsi.
Mr Peltz also proposes that Pepsi, before splitting, buys the snack company Mondelez. His notion that $3bn in annual savings could be found at a company with $71bn in revenues is reasonable. But this must be weighed against all the risks of doing a $65bn acquisition (of a company that was itself just spun out of Kraft), then a spin out of a company worth at least that much. Let the wrestling begin.
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