Why PepsiCo won’t buy Mondelez


Activist investor Nelson Peltz wants PepsiCo Inc. to buy Mondelez International Inc. for US$35 to US$38 per share in an all-stock deal that could total more than US$67-billion.

Mr. Peltz’s hedge fund, Trian Fund Management LP, disclosed stakes in both companies in April. He has already met with PepsiCo chief executive Indra Nooyi, who apparently “doesn’t love the deal.”

Mr. Peltz acknowledged this during his presentation at the CNBC Institutional Investor Delivering Alpha Conference in New York on Wednesday. Some of the reasons he highlighted include limited synergies between sweet and salty snacks, too much debt for capital markets to bear, and the combined company would be too big to grow.

J.P. Morgan analyst John Faucher agrees, or at least believes the deal would be difficult to pull off.

“With neither company operating at full speed at this point, we think adding in massive integration would only exacerbate their problems despite potential EPS accretion,” he told clients. “As we have said before, we don’t think the market has enough faith in PepsiCo management at this point to pull off a deal of this size.”

Mr. Faucher also remains skeptical of any deal that involves combining direct store delivery networks, since disruptions can lead to sales volatility.

While Mr. Peltz’s plan calls for Mondelez shareholders to receive a 16% premium, the analyst doesn’t understand why they would also receive a special dividend.

He noted this scenario would leave PepsiCo 4.23x levered with net debt of US$80-billion.

“That seems aggressive,” Mr. Faucher said.

If his plan to buy Mondelez doesn’t work, Mr. Peltz wants PepsiCo to spin off all or part of its beverage business. He estimates this would be worth US$136 to US$144 for PepsiCo stock by the end of 2015.

“With valuations high in staples right now, there is an argument that a spin out of a branded North American beverage business could drive value,” Mr. Faucher said, adding that it is tough to see brands like Gatorade and Tropicana not trading at double-digit EBITDA multiples. “That said, we still believe that the competitive nature of the beverage industry creates risk to this type of spin.”

PepsiCo may be able to dismiss any talk about Mondelez, but Mr. Faucher believes the company needs to address its plans for its bottling assets.

Management insists it is exploring all options, but without significant shareholder pressure, the analyst thinks selling brands is an unlikely course of action.

Michael Steib at Credit Suisse believes that unlike 12 months ago, PepsiCo’s current share prices does not undervalue either the food or beverage business.

He also thinks that if the company maintains the status quo, further shareholder value can be created by accelerating top-line growth as PepsiCo reinvests its considerable cost savings.

The analyst highlighted that Mondelez’ recent major restructuring is the product of several large acquisitions, which have yet to be integrated.

“We think that for PepsiCo to take on the challenge of integrating Mondelez while at the same time executing its own strategic plan carries a lot of execution risk,” Mr. Steib said in a research note.

He also argues breaking up PepsiCo into separate food and beverage businesses is unlikely to create significant value given the stock’s stellar performance over the past year and its valuation, which is in line peers.

As long as PepsiCo can successfully execute its current plan, Mr. Steib is confident the company can convince investors there is no need for such a dramatic strategic change.

“That said, investor pressure could certainly mount if operating performance deteriorates from here,” the analyst said.

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