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

Both of these companies are highly leveraged. In particular, Mondelez has a debt load of nearly $20 billion and a cash balance of just over $4.5 billion. Although it offers adequate free cash flow of about $1.6 billion, this may not be enough to reduce its leverage in a timely fashion. For its part, PepsiCo has $29 billion in debt to about $7 billion in cash. Proportionally, its levered free cash flow figure of nearly $7 billion is much better than Mondelez’s.

Past Peltz Moves

Through Trian, Nelson Peltz has accumulated noticeable stakes in both of these companies. In the grand scheme of things, neither is particularly large. However, Peltz’s past decisions as an investor suggest that he must be taken seriously.

The man’s legacy with H.J. Heinz Company (HNZ) is a good place to start. After a lengthy proxy battle with the company, Peltz eventually got most of what he wanted. In hindsight, he has been credited with shoring up the company’s fortunes and turning into an attractive acquisition target. His final vindication came with the recent announcement that Warren Buffet’s company was interested in absorbing the company into its ever-growing portfolio.

His 2008 acquisition of Wendy’s serves as another example of Peltz’s propensity for waging aggressive proxy battles for struggling food companies. While PepsiCo and Mondelez are probably too large for Peltz to establish an outright majority stake in either firm, his past moves suggest that he may be able to exert his influence by other means. Some may speculate why he hasn’t included some of these firms as his targets.

Ramifications and Potential Plays

PepsiCo and Mondelez investors have a right to be uneasy about the prospect of Peltz waging a proxy battle for either of these companies or engineering a spin-off or merger that might not be in their best interest. However, these worries may be premature. Despite intensifying rumors that Peltz will put forward some kind of plan for closer ties between the two companies, there have been no on-the-record conversations or statements about what such a move might look like. Moreover, hindsight has generally shown Peltz’s moves to provide shareholders with long-term value.

Going forward, investors should be prepared for further developments. Since Peltz appears to have close relationships with many activist and institutional investors in PepsiCo and Mondelez, he may be working behind the scenes to craft a workable alliance or put together financing for a potential proposal. Although it is unlikely that anything will come to pass before the end of the year, the pieces could fall into place shortly thereafter. In the event that this situation produces a complex merger between spun-off components of PepsiCo and Mondelez, investors may wish to establish long positions in these companies prior to any definitive announcement

The article What Does Peltz’s Stake Mean for PepsiCo and Mondelez? originally appeared on and is written by Mike Thiessen.

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