Nelson Peltz Ups His Battle Against Pepsi
Activist investor Nelson Peltz is on a mission to break up PepsiCo (NYSE: PEP) into two divisions consisting of its beverage division and snack division.
Peltz is the founding Partner and Chief Executive Officer of Trian Fund Management, a multi-billion dollar alternative investment management firm. Trian owns around 0.8 percent of Pepsi shares and has never shied away from voicing his displeasure in how Pepsi continues to disappoint investors with dismal returns.
Peltz argues a split of Pepsi would slash operating costs and allow for a more focused marketing initiative and faster growth. Peltz also suggests the company to consolidate four headquarter facilities into two.
Peltz has thus far been unsuccessful and has been shot down by Pepsi's management at every occasion.
On Thursday, Peltz released a seven-page letter to Pepsi's management in response to a Pepsi letter dated February 27, in which Pepsi's director Ian Cook argued that Peltz's initiatives would erode shareholder value, not create value, due to misleading "financial engineering."
The tone of Peltz's latest letter suggests he has no intentions whatsoever to give up his fight.
Peltz opened his letter by stating that the board of directors and management are “obligated to provide shareholders substance and analytics” and to substantiate management's claims that the company operates better as a whole instead of parts. He argues that his firm has conducted a year of due diligence that is backed up by decades of experience in the beverage industry, which includes Peltz himself successfully acquiring and turning around Snapple.
Peltz's suggestions are straightforward and logical. All the activist investor wants is for Pepsi to accept his suggestions or to justify why this is not the best course of action.
Peltz argues that Pepsi could benefit from closing its Purchase and Chicago facilities; shift production of Quaker Oats to be run out of Frito-Lay; and Tropicana to be run out of North American Beverage. Doing so would reduce “billions of dollars” in related costs. These savings could be passed along to shareholders or for additional investments in the brands.
“We note that the company's return on invested capital (ROIC; defined as net operating profit divided by average debt and shareholders' equity) has declined from 25% in 2006 to 14% today while earnings per share (EPS) growth has materially trailed peers and management's own targets,” Peltz further argues to diminish the credibility of Pepsi's current management team.
Bottom line, Peltz asserts that Pepsi's board continues to use “rhetoric and catch phrases” to mask its performance.
“Either way, we believe – at any reasonable multiple of earnings – there will be tens of billions of dollars of shareholder value created by the increased profitability.”
With a management team solely focused on the beverage business, Pepsi can continue to focus on what Peltz acknowledges is an “amazing snacks business” that could be even better.
“We believe Frito-Lay could perform even better if standalone management were allowed to market, invest and make strategic decisions with no interference from corporate.”
By separating the businesses in two, the snack division could “accomplish great things.”
PepsiCo reached out and issued this statement:
"“PepsiCo has a strong, independent board of directors that is committed to the highest standards of corporate governance and transparency. Under our corporate governance guidelines major shareholders may consult with our presiding director at any time. In fact, our independent presiding director and one other independent board member have already met with Trian without management present.
The board has thoroughly reviewed Trian's proposals and has concluded that they would not maximize shareholder value. The board of directors is confident in the thoroughness of management's analysis and leadership, and in the conclusion that sustained value creation for PepsiCo's shareholders is best optimized as an integrated food and beverage company. Our board and management continues to be open to engagement with shareholders.”
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