By Max Rothman
A rigid corporation and a full-pocketed investor walk into a bar. The rigid corporation, in no mood to shake things up, tells the barkeep: “the regular.” The full-pocketed investor, mulling its billion-dollar stake in the corporation, feels an itch for change.
“Let’s go with something new,” the investor says to the barkeep. “For the both of us. And make it worthwhile.”
The rigid corporation doesn’t seem to care what the investor is drinking, but knows it wants the regular and nothing else. The investor insists. The corporation again holds firm.
No one’s laughing.
That’s one way of looking at the current relationship of PepsiCo and Trian Partners, the firm headed by activist investor Nelson Peltz. Trian holds a stake in the soda and snacks giant worth approximately $1.2 billion. PepsiCo’s current market capitalization is nearly $120 billion, according to New York Stock Exchange Euronext.
Trian remains adamant in its belief that PepsiCo should split its snacks and beverages into two independent public companies. PepsiCo, which has been steadfast in its “Power of One” platform, hasn’t budged. The company believes that the strategy allows for “full coordination across the food and beverage operating systems, while also unlocking opportunities to create value across the business.”
Trian recently detailed its stance in a 31-page white paper, which explains how the division could benefit the business and shareholders. After months of what Trian considers to be “historical underperformance” by Pepsi, the firm expressed disappointment following PepsiCo’s fourth quarter earnings call in which CEO Indra Nooyi stated that the company will not make any structural changes this year.
In a letter to Ian M. Cook, presiding director of PepsiCo’s board, Trian explain its discouragement.
“It is clear we have vastly different views on the best path forward for PepsiCo,” Trian writes. “It appears that PepsiCo views structural change as a sign of weakness, an admission of failure and an untenable break from past traditions. Trian views structural change as the best path forward to generate sustainable increases in shareholder value.”
In the white paper, Trian outlines the following concerns:
PepsiCo has underperformed since 2006, the firm argues, which is due primarily to the company’s “Power of One” strategy. This was affirmed by PepsiCo’s report of low-quality earnings-per-share growth in 2013 and deteriorating trends in its North American beverages business.
PepsiCo’s belief that the current structure maximizes value contradicts years of underperformance. Trian believes this view is “highly subjective and lacks analytical support.”
In July, when Trian first publicly advocated its belief in dividing the company’s snacks and beverages, PepsiCo shared traded up to about $87 per share. As of press time, PepsiCo sits at about $78.28 per share. Trian approximates that this amounts to a loss of about $15 billion.
Trian states that the structural change would unlock value at PepsiCo by eliminating overhead, driving cost savings and enable greater investment in brands. The standalone snacks business, the firm states, would increase sales growth, margins and free cash flow generation. A standalone beverage business, Trian states, would provide strong, stable free cash flow that could be optimized through an effective balance sheet and capital return program.
“A separation would create two leaner and more entrepreneurial companies,” Trian writes.
While some may at PepsiCo may argue that the structural change wouldn’t allow the company to compete with Coca-Cola, Trian offered a rebuttal. The firm states that, even with its snacks business, PepsiCo hasn’t competed against Coke for many years. On top of that, Trian believes that Dr Pepper Snapple Group has shined since 2008, when it split ways with Cadbury, the company’s former food and snacks partner, amid a financial crisis.
Another recent example, heavily influenced by Trian and Peltz, is the decision of Kraft Foods Group to split itself into two companies, separating its snacks business, now called Mondelez International, and its North American grocery business, which is known as Kraft Foods.
“Significant value can be unlocked when large companies separate business to create focus,” Trian writes.