The investor Nelson Peltz just put an end to PepsiCo's delay game. He went public on Wednesday with a $60 billion-plus plan to join Pepsi's salty nibbles with the sweet treats of Mondelez International, or alternatively, to carve up Pepsi, a company with a market value of more than $130 billion.
Both ideas are Activism 101. Mr. Peltz, however, makes a sensible enough case that it puts the onus on Pepsi's chief, Indra Nooyi, to make a strong defense.
The pressure has been building at Pepsi. Analysts have been arguing the merits of a breakup for a while. Earlier this year, Mr. Peltz, who leads Trian Fund Management, disclosed his stakes in both companies, which led to speculation he might try to push them together as he did when he urged Kraft to take over Cadbury. Pepsi meekly dismissed the idea and plodded ahead with its “Power of One†campaign showcasing the synergies of soda and chips.
While the health merits of combining Pepsi's Doritos and Mondelez's Oreos may be indefensible, the financial logic is compelling. Mr. Peltz first takes aim at Pepsi's lagging shareholder returns under Ms. Nooyi against rivals, including Coca-Cola and Hershey, and its comparatively low investment in advertising as a percentage of sales. Buying Mondelez and then spinning off Pepsi's beverages, he argues, would be the best way to turn things around.
Even ignoring Mr. Peltz's case for $3 billion in revenue synergies, if 8 percent of Mondelez's sales could be hacked out in the form of cost savings it would amount to some $3 billion a year alone.
Citigroup analysts in March saw great value in a Pepsi-Mondelez deal assuming no synergies at all. Mr. Peltz also imagines an all-stock transaction with a 16 percent premium, giving shareholders of both companies the ability to share in any upside.
Other, less-ambitious ideas would forget Mondelez and simply spin out all or parts of Pepsi's drinks arm. These would be weaker options to Mr. Peltz's mind but would still create at least twice as much value for Pepsi investors as sitting still. Though the analysis may resemble a Wall Street pitch book, Mr. Peltz also brings with him a calling card of success upending the food industry - including Wendy's, Heinz and Kraft.
Pepsi has said it will provide a review of its North American beverages business next year. At this stage, it'll have to serve up heartier fare.
Jeffrey Goldfarb is an assistant editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
