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. Here's what you need to know.
Pelted by Peltz
Without a doubt, PepsiCo has been through a tough past couple of years. Domestic cola sales have declined and market share has been lost to beverage rival Coca-Cola (NYSE:KO). In an effort to turn things around, PepsiCo has restructured its business operations, slashed thousands of jobs, and cut costs. It's ramped up international expansion, launched new products, and heightened promotional campaigns in an effort to boost profits and enhance shareholder value. PepsiCo's also implemented share buybacks and increased its dividend.
Yet those efforts haven't been enough to keep Peltz off PepsiCo's back. The activist investor thinks the company should merge its salty snacks with Mondelez's sweet treats, creating a company with nearly $70 billion in annual revenue and almost a dozen and a half iconic billion-dollar brands, including Lay's, Doritos, Tostitos, Nabisco, Oreo, Cadbury, and Trident. He also thinks PepsiCo should spin off its slower-growing beverage business, whose brands include its namesake cola, Gatorade sports drinks, and Tropicana juices. So far, PepsiCo management is stale to the idea.
Chew on this
Until very recently, PepsiCo's stock price hadn't reaped much reward from the company's multi-year-long restructuring efforts. Yet PepsiCo has grown market share in both developed and emerging markets for its Quaker and Lay's brands during the past several years. Its Frito-Lay North America segment grew organic revenues 4% during the first quarter. In fact, the mature snack food market presents PepsiCo with few challengers to its market share. Kellogg (NYSE:K), one of its closest big-branded competitors, has less than one-fifth of PepsiCo's U.S. salty snack market share. This leaves the dominant snack food maker with a main objective to increase the overall size of the market.
And amid recent declines in stagnant domestic soda sales, PepsiCo has actually increased performance in its beverages division. Its closely watched American beverage segment posted a 4% gain in operating profit during the first-quarter of this year. Operating margins also expanded, thanks in part to productivity gains.
Whether or not the proposed merger actually comes to fruition is anyone's guess. This isn't the first time Peltz has called for major shakeups at some of the world's largest food and beverage companies, and it probably won't be the last. But with PepsiCo on track to deliver its targeted $3 billion in productivity savings by 2015 and its stock currently trading near its all-time high, the company and many of its shareholders believe true synergies exist between PepsiCo's snack and beverage businesses.
Fool contributor Nicole Seghetti owns shares of PepsiCo and Mondelez International. Follow her on Twitter: @NicoleSeghetti. The Motley Fool recommends Coca-Cola and PepsiCo and owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.