Proposing a Value-Enhancing Deal for PepsiCo, Inc. (PEP)

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PepsiCo, Inc. (NYSE:PEP) has outperformed most of its peers over the past 12 months. After trailing The Coca-Cola Company (NYSE:KO) for a long period of time, the company has caught up and now trades at a very small discount to Buffett’s favorite company.
PepsiCo, Inc. (NYSE:PEP)
There are two explanations for such overperformance. First of all, last year PepsiCo, Inc. (NYSE:PEP) presented a medium-term strategic plan, which was followed by good operating results. Secondly, the market is expecting a large-scale strategic change. Here I will focus on the much-awaited strategic change. Specifically, I will analyze the possibility of PepsiCo, Inc. (NYSE:PEP) dividing itself into one food (snacks) company and another beverage company. I think that if this were to happen many other enterprises would be interested into merging with those separate entities.
Here, I will examine the pros and cons of a possible merger of PepsiCo, Inc. (NYSE:PEP)’s beverage business with Anheuser Busch Inbev SA (ADR) (NYSE:BUD), which already distributes PepsiCo, Inc. (NYSE:PEP) beverage products in various parts of Latin America, such as Brazil and Argentina. But first, I will review the pros and cons of a potential merger between PepsiCo, Inc. (NYSE:PEP)’s food business with Mondelez International Inc (NASDAQ:MDLZ).
The absolute world-wide snacks powerhouse.
If PepsiCo’s food business would merge with Mondelez International Inc (NASDAQ:MDLZ), I see a number of significant pros.
Pros:
- Global top-line of $68 billion would make this food company the world’s second largest.
- The combined advertising budget would be as large as $3 billion, which would be one of the largest in the food industry .
- Mondelez would get a better exposure to emerging markets while both companies could cut costs in developed markets.
- The two companies could leverage their unique market position through combining their  procurement and R&D platforms. The combined R&D budget could go as high as $700 million (the second largest in the food industry).
Cons: There is essentially one–high break-up costs. According to Mondelez International Inc (NASDAQ:MDLZ)’s filings, the total break up costs at the Kraft-Mondelez de-merger were as high as $2.7 billion. Taking into account that deal, Credit Suisse’s analysts calculate that de-merging PepsiCo would come with one-time costs that could go as high as $2.1 billion (the calculation is made by adding up on-going synergies that do exists between PepsiCo’s food and beverage units).
A marriage that could be extended from Latin America to the world.
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