Peltz Won't Be Snacking on Pepsi

The activist investor gives up on Plan A after taking a role with the snack foods giant.

Jan 22, 2014 at 5:30PM

Maybe it's the old adage that one in the hand is worth two in the bush that's driving activist billionaire investor Norman Peltz to back off his push to have PepsiCo (NYSE:PEP) buy global snack food giant Mondelez International (NASDAQ:MDLZ)

Images

After almost a year of pestering Pepsi to calve off its underperforming beverage division and use its remaining Frito-Lay unit to acquire Mondelez to create a truly massive international snack food business, Peltz is letting the acquisition drive go after accepting a seat on Mondelez's board of directors. He must be softening with age because he's also relenting in his fight to have the company change its name.

There was a lot of sense in Peltz's proposals. Even with a global footprint, Mondelez derives less than 20% of its sales from North America, with most of the rest coming from emerging markets. While Pepsi also generates around a fifth of its revenues from Frito-Lay North America, at $13.5 billion it's about twice the amount Mondelez realized.

Pepsi is the biggest snack food business, well ahead of cereal maker Kellogg (NYSE: K), which was catapulted to the No. 2 spot after its acquisition of the Pringles potato chip business from Procter & Gamble (NYSE: PG) in 2012. If it was freed from the beverage business millstone hanging around its neck, Pepsi could become even more of a snack foods juggernaut.

But Pepsi CEO Indra Nooyi has rejected the idea of buying up its rival or splitting off its drinks business, believing snacks and beverages are a complementary union. That might work well in a bar where you'll order more drinks after downing a handful of salty peanuts, but scarfing down some Doritos doesn't necessarily mean you'll be reaching for a Mountain Dew to wash it down. 

Graph

Indeed, the beverage business has suffered from more than five years of negative volume growth, more than a decade of declining per capita volume, and is perennially the also ran behind Coca-Cola (NYSE: KO), which operates a more focused business. In comparison, Pepsi remains at the top of its game in mind and market share for snacks as it experiences volume growth across all its business lines.

Graph

Includes Frito-Lay North America and Latin America Foods.

Peltz still believes Pepsi should calve off the drinks business and won't stop advocating for that to happen -- what he has called "Plan B" -- but now with his insider position at Mondelez he can achieve similar results for the snacks company (and himself) by pushing for it to reduce expenses. He owns sizable positions in both companies so he can still work to effect change at both.

Mondelez has run into a slowdown of growth in emerging markets. Even though those markets experienced double digit growth last quarter, weak biscuit performance in China coupled with headwinds in coffee pricing and slower overall growth, led it to miss its own expectations let alone those of Wall Street.

Sadly, Peltz has also given up the fight for Mondelez to change its name, which he previously likened to sounding like a disease. Mondelez is a mashup of the Latin word for "world" and a fanciful expression of 'delicious," according to a company press release last year, and Peltz has said it is being harmed operationally because of the awful sounding and nearly unpronounceable name.

As consumers continue to turn away from soft drinks, not least because of growing concerns over the inclusion of aspartame, high fructose corn syrup, and other artificial additives, Pepsi is going to continue to struggle. Yet that means it may end up looking like it's performing better than Coke because it is more diversified, but if Frito-Lay wasn't weighed down by the drinks business it could do even better.

Peltz, in the meantime, will nibble away at costs over at Mondelez, and that may be reason enough for investors to want to snack on it itself.

Feast on these returns
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report, "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. It recommends and owns shares of Coca-Cola and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers