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 (NASDAQ:PEP) buy global snack food giant Mondelez International (NASDAQ:MDLZ).
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.
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.
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.