PepsiCo, Inc. (PEP), Mondelez International Inc (MDLZ): Maverick Investor Seeking A Merger?

With the recent disclosure that he had taken significant stakes in both PepsiCo, Inc. (NYSE:PEP) and Mondelez International Inc (NASDAQ:MDLZ), it is fair to speculate on the motives of maverick investor Nelson Peltz. Based on his previous experiences with well-known companies, it seems possible that he intends to leave his mark on both firms’ boards. Indeed, more dramatic moves might not be out of the question.

PepsiCo, Inc. (NYSE:PEP)Both of these companies find themselves at crucial inflection points. PepsiCo, Inc. (NYSE:PEP) is in the early stages of exploring spin-off options for its North American bottling operation, and Mondelez International Inc (NASDAQ:MDLZ) has under-performed market-watchers’ expectations since separating from Kraft (K) in 2012.

According to the most recent filing, Peltz’s Trian Fund Management now has a $270 million stake in PepsiCo, Inc. (NYSE:PEP) and a $494 million stake in Mondelez International Inc (NASDAQ:MDLZ). For Mondelez International Inc (NASDAQ:MDLZ), this equates to less than 1 percent of its market capitalization. For PepsiCo, Inc. (NYSE:PEP), Peltz’s stake represents little more than a rounding error however the fact that Peltz and PepsiCo, Inc. (NYSE:PEP) are already engaging in “strategic, long-term” discussions suggests that the investor has big plans for these firms.

PepsiCo and Mondelez at a Glance

PepsiCo, Inc. (NYSE:PEP) is a massive food and drink distributor that markets many recognizable brands. In addition to signature drinks like Pepsi and Gatorade, the company also sells a variety of breakfast cereals, snacks, coffees, teas and juices. Meanwhile, Chicago-based Mondelez International Inc (NASDAQ:MDLZ) primarily offers coffee and cracker products through brands like Nabisco, Cadbury and Oreo. It also markets Trident gum and Tang juice mixes.

The synergies between PepsiCo and Mondelez International Inc (NASDAQ:MDLZ) are obvious. The companies have plenty of redundant divisions that would mesh well together, and the prospect of a Pepsi drinks spin-off raises the possibility that the “dry foods” components of the two companies could combine in a merger. At this point, such a scenario is highly speculative. Nevertheless, investors cannot discount the obvious utility in combining similar pieces of these two companies.

Financial Comparisons

It might be useful to compare PepsiCo and Mondelez to determine whether the two are suitable merger partners. For starters, both companies are solidly profitable. In 2012, PepsiCo earned about $6.1 billion on $65.2 billion gross revenue and walked away with a profit margin of 9.3 percent. At over 27 percent, its return on equity figure was significantly better. Meanwhile, Mondelez earned $1.5 billion on $35 billion gross revenue for a final margin of 8.6 percent. Its return on equity figure of less than 5 percent left something to be desired.