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War of Words Escalates as PepsiCo Strikes Back at Peltz

By Rich Duprey - Mar 3, 2014 at 9:46AM

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The beverage and snack company lets the activist investor know in no uncertain terms how it feels.

PepsiCo ( PEP 2.55% ) finally decided it was time to put Nelson Peltz in his place.

After watching the billionaire investor repeatedly tag the company for failing to act on his proposals to divide the company in two, the snacks and beverages company apparently felt it could no longer remain silent. In a letter issued to Peltz last week, Pepsi's presiding director Ian Cook delivered a cold but united response, advising him that "the board and management are comfortable and in complete alignment in rejecting your proposal" to break up the company.

As shareholders and hedge funds have turned more activist in an attempt to unlock value and otherwise get their way, the level of acrimony between them and their targeted boards of directors has risen in kind.

Men's clothing retailer Jos. A. Bank verbally sparred with Eminence Capital, which backs the retailer's takeover by rival Men's Wearhouse, and suggested the only reason it endorses the acquisition attempt by its rival is to cover the big bets it made that would lose it a lot of money if a deal didn't go down. Eminence Capital also got into a spat with Men's Wearhouse for refusing to engage in a dialogue with Bank when the tables were turned.

Cracker Barrel Country Store told Biglari Holdings' Sardar Biglari it would pay him the market value of his shares if he would simply go away and leave them alone. While he originally rejected the proposal, Biglari recently said he would do just that since "We would not want to leave our money in your care."

Sandell Asset Management is suing the board of Bob Evans Farms for allegedly attempting to strip shareholders of their rights, Engaged Capital says Abercrombie & Fitch CEO Michael Jefferies doesn't possess the "demonstrated expertise or competency" to lead the company anymore, and Bill Ackman packed up and took his marbles home after his Pershing Square Capital could no longer influence the direction department store retailer J.C. Penney was taking.

Barington Capital's charge that Darden Restaurants' plan to spin off its Red Lobster concept is "incomplete and inadequate" is mild in comparison, though Starboard Capital did chime in, saying it would "destroy shareholder value."

Peltz, of course, hasn't been exactly tame with his own assessment of Pepsi's decision not to take up his idea to separate the beverage business from the snack business, calling management's "rationale for maintaining the current structure highly subjective, full of platitudes and lacking strong supporting analytics." That the board should respond is not so surprising, but the deft parry and dismissal of the investor who owns some $1.2 billion of the company's shares isn't to be missed.

However, after fully considering and rejecting your proposals, the board and management have turned their attention to running the integrated company for the benefit of all shareholders and delivering the financial commitments projected. We thank you for your interest in PepsiCo.

Cook essentially said: We heard what you had to say, we reject it, and we have other things we'd rather be doing. But, hey, thanks for stopping by!

Some ideas that activist investors peddle seem misguided, such as Biglari's call to have Cracker Barrel pay out a special dividend; others may be the right idea though the wrong execution, as I've suggested is happening at Darden. And while everyone knows Jos. A. Bank and Men's Wearhouse would be perfect together, neither side wants to give up its power base and be the one acquired rather than do the acquiring.

I've said before that Nelson Peltz's program for maximizing shareholder value has a lot of merit, that the snack business is being held back by drinks, which is experiencing a worrisome decline in volumes and sales, and has been for years.

Still, PepsiCo's board thinks its own way is best and has had enough of allowing Peltz to tweak its nose with impunity. The letter was coldly efficient, though still above the level of acrimony seen between companies and other activist investors. But as the war of words mounts, we just might see fireworks being shot by PepsiCo, too.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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