If Nelson Peltz gets his way, shares of PepsiCo, Inc. (NYSE:PEP) could double. The billionaire investor, known for his activism, laid out the case for PepsiCo, Inc. (NYSE:PEP) on Wednesday at CNBC’s Delivering Alpha conference.
So, should investors buy into PepsiCo, Inc. (NYSE:PEP)?
Peltz thinks PepsiCo has some problems
Peltz’s basic argument is that PepsiCo, Inc. (NYSE:PEP) has some fundamental organizational problems. Although he claims to be a big fan of PepsiCo’s current CEO Indra Nooyi, he believes that PepsiCo is limited by its conglomerate status.
When most people, including the analysts that follow the company, think of PepsiCo, they think of the namesake beverage. According to Peltz, that’s a mistake — Frito-Lay makes up the vast majority of the company’s value, and accounts for nearly all of its potential growth.
Peltz believes Pepsi’s management is “robbing Peter to pay Paul” in the way that the company is inappropriately shifting funds from a high-growth division (Frito-Lay) to a low growth one (carbonated beverages).
Even if Pepsi doesn’t want to buy Mondelez International Inc (NASDAQ:MDLZ), Peltz still thinks investors would be better served by splitting the company in two. In that scenario, Peltz imagines the stock hitting $145 per share.
It would benefit PepsiCo to buy Mondelez
Peltz has a big stake in Mondelez — and that’s putting it mildly. As of his fund’s last 13F filing, over a quarter of Peltz’s capital was in Mondelez stock.
Since the spinoff was completed last October, Mondelez’s stock has performed moderately well, rallying about 10%. But, as Peltz points out, the company has had trouble with its margins. So is Peltz just looking to get Pepsi to buy so he can unload his shares?
Stifel Nicolaus analyst Mark Schwartzberg believes buying Mondelez would be good for Pepsi. He argued that it would add to Pepsi’s earnings almost immediately — 20% in the first year.
But is Pepsi going to actually buy Mondelez? Maybe The Coca-Cola Company (NYSE:KO)?
At this point, it’s a stretch to assume any deal is forthcoming. Peltz admitted (from talking to Pepsi’s management) that the company isn’t particularly enthralled with his idea, and Schwartzberg agrees, seeing no evidence for such a merger.
CNBC’s Jim Cramer suggested that there could be another buyer for Mondelez: the other major beverage giant, The Coca-Cola Company (NYSE:KO). However, Schwartzberg (who also covers Coke) doesn’t think that’s likely at all, and it wouldn’t fit Peltz’s logic.
Peltz’s premise is that there are business synergies to be gained by combining Pepsi’s salty snacks with Mondelez’s sugary sweets (Oreos, Cadbury, etc). In fact, Peltz wants Pepsi to separate the beverage business into a more Coke-like entity.
