2 Reasons for a PepsiCo-Mondelez Merger

Activist investor Nelson Peltz is shaking things up in the snack-food world. He recently expressed strong feelings about a proposed PepsiCo (NYSE: PEP  ) and Mondelez International (NASDAQ: MDLZ  ) merger. So far, PepsiCo management hasn't nibbled on the idea. Yet, there are two main reasons Peltz's proposal has merit.

1. Synergies and scale
A merger of PepsiCo's salty snacks with Mondelez's sweet treats would create a company with nearly $70 billion in annual revenue and a super-strong franchise of almost a dozen-and-a-half iconic billion-dollar brands like Lay's, Doritos, Oreo, and Cadbury. Peltz laid out in his megadeal the synergies and economies of scale he feels could be gained by putting PepsiCo's chips and Mondelez's cookies on the same trucks to the same markets worldwide.

By leveraging Mondelez's global distribution network, the activist investor feels PepsiCo can turnaround its declining snack-food growth trajectory. The overall snack category has been growing, but organic growth for PepsiCo's Frito-Lay North American business has decelerated. In fact, it's slowed from 6% annually between 2002 and 2009, to 3% between 2009 and 2012. Peltz feels the main reason for this decline is that the company is being weighed down by the beverage business.

2. Shedding an underperforming business
As U.S. cola sales have decayed, and market share has been lost to Coca-Cola, Peltz feels PepsiCo should divest its slower-growing beverage business, allowing it to concentrate on its more-profitable snacks. Beverages bring in nearly half of PepsiCo's annual revenues, yet they're a drag on the company's operating profit. The activist investor believes the merger could yield an implied value of $175 per share for PepsiCo, and $72 per share for Mondelez, by the end of 2015. 

Peltz feels PepsiCo could achieve substantial increases in shareholder value worth at least $33 billion by cleaving the beverage business, and merging the remaining snack business with Mondelez, whose stock has languished since splitting from Kraft Foods Group (NASDAQ: KRFT  ) last year. The activist investor points to several examples of other similar acquisitions and divestitures to support his idea, including PepsiCo's spinoff of Yum! Brands  (NYSE: YUM  ) .

Peltz has a history of shaking things up with the industry. The investor played a key role in Cadbury splitting its beverage and candy businesses, and then getting what was Kraft Foods to buy Cadbury. Peltz then helped Kraft spin off its slow-growing North American grocery business, now know as Kraft Foods Group, from its global snack-food business, which was renamed Mondelez.

Foolish final thoughts
Recent investor campaigns against major companies -- like Bill Ackman's successful ousting of former Procter & Gamble CEO Bob McDonald -- have garnered attention, underscoring that the business community is searching for ways to optimize shareholder value. PepsiCo has made it clear that it's not embracing Peltz's proposal. But his prodding may influence some type of future action from PepsiCo and Mondelez.

Do you love dividend stocks? Rock-solid dividend stocks like PepsiCo don't garner the notoriety of high-flying growth stocks, but they're less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of the only nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2577488, ~/Articles/ArticleHandler.aspx, 12/20/2014 4:01:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement