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Is Mondelez a Company Worth Snacking On?

By Rich Duprey - Apr 20, 2013 at 11:15AM

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Persistent speculation suggests Pepsi thinks the snack-food company would make a good mix.

While speculation has swirled for a while now that activist investor Norman Peltz was interested in a merger between PepsiCo (PEP 0.98%) and Mondelez International (MDLZ 2.02%), fresh fuel was thrown on the fire after the beverage maker revealed that it has indeed been in discussions with Peltz's Trian Fund Management in recent weeks "to discuss and consider their ideas." The news comes after Peltz also disclosed that he continues to amass holdings in both companies and the likelihood of a merger between the two them grows.

Cut the cheese
Peltz has a history of shaking up management, and I pointed out last month he forced the hand of Cadbury into splitting its drinks and candy business in two and then agitating for the old Kraft company to acquire it. It was then Peltz who pushed for the divestiture of Mondelez from the current Kraft Foods (KRFT.DL).

I noted last month that there were three possible outcomes for what Pepsi might do: acquire Mondelez, spin off off its Frito-Lay snack-foods business, or do a merger-spinoff similar to what transpired with Cadbury and Kraft.

Opportunity bubbling up
If it happens, my money is on the first path. Last week, during Pepsi's first-quarter conference call, Chairman and CEO Indra Nooyi said mature, low-growth businesses need to reinvent their industry, and while she was talking primarily about Pepsi's drink business, she pointed out how a company needs both cash cows (beverages) and growth vehicles (snacks) and believed Pepsi had the right combination to generate profits for investors.

Yet analysts who think it may be more complicated than that point to Coca-Cola (KO 0.59%) and its successful, nearly single-minded focus on beverages. A spinoff of Frito-Lay (or a merger with Mondelez before spinning off snacks) would give it a better chance of catching its arch-nemesis.

Snack on this
However, beverages are that sort of mature, low-growth business Nooyi described, and Pepsi needs to have the spark that snack foods provide to finance the growth options it's considering. Coke also needs to improve its profitability, which is why it's opting to go to a franchising model with its bottlers -- something Pepsi already did.

Pepsi has a lever of growth it can pull in its snack division, and adding Mondelez to the portfolio -- and not dumping it back on the market -- will separate itself from the competition while allowing it to pay for the reinvention its CEO says is vitally needed.

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Stocks Mentioned

The Coca-Cola Company Stock Quote
The Coca-Cola Company
$64.68 (0.59%) $0.38
Pepsico, Inc. Stock Quote
Pepsico, Inc.
$171.77 (0.98%) $1.66
Mondelez International, Inc. Stock Quote
Mondelez International, Inc.
$63.76 (2.02%) $1.26
Kraft Foods Group, Inc. Stock Quote
Kraft Foods Group, Inc.

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