Should PepsiCo Go 'Asset-Light' Like Coca-Cola?

Much has been written about The Coca-Cola Co KO creating a more asset-light model by divesting most of its owned bottling assets. Nomura’s Ian Shackleton pointed out that a higher ROIC could result in more returns to shareholders.

Similar Strategy By PepsiCo

If PepsiCo, Inc. PEP were to strip out owned bottling assets in North America and Europe, this could up the group ROIC from 17 percent to 25 percent, with +600bp in NA and +200bp in Europe, analyst Ian Shackleton said. This would release about $15bn in cash.

He added, however, that in the absence of a dedicated bottler network like what Coca-Cola has, it is less clear how PepsiCo would achieve this.

A disposal of NA/Europe bottling could dilute EPS by 6 percent. However, if cash proceeds are returned via a buyback, this dilution would reduce to 3 percent. Shackleton further mentioned that such a divestment would change the profit skew for food/beverages from 60/40 to closer to 75/25.

“This raises the question of whether PEP beverages can compete with KO globally, and we consider a theoretical end game solution involving a merger with several other beverages companies, which could leave a better competitive position,” the analyst wrote.

Shackleton maintained a Neutral rating for PepsiCo, with a price target of $100.