Trian’s Peltz Says He Thinks PepsiCo Should Buy Mondelez

Trian Fund Management LP's Nelson Peltz, the activist investor who owns stakes in PepsiCo Inc. (PEP) and Mondelez International Inc. (MDLZ), said yesterday the soft-drink maker should acquire Mondelez for as much as $67.8 billion.

PepsiCo, the world's largest snack food maker and second-biggest soda producer, should buy Mondelez for $35 to $38 a share in an all-stock deal, Peltz said. Mondelez, the Deerfield, Illinois-based maker of crackers and sweet snacks, closed at $29.87 on July 16 in New York before Peltz's comments, giving the company a market value of about $53.3 billion.

"Pepsi is at a crossroads at this time," with a cash business in beverages and a growth business in snacks, Peltz, Trian's chief executive officer, said yesterday at the CNBC Institutional Investor Delivering Alpha Conference in New York. PepsiCo Chief Executive Officer Indra Nooyi "inherited a structure that we don't think works anymore," he said in an interview with Andrew Ross Sorkin.

Peltz has approached Purchase, New York-based PepsiCo about buying Mondelez and met often with Nooyi, he said, adding that "Pepsi doesn't love the deal" right now.

If PepsiCo declines to buy Mondelez, plan B should be to separate beverages from the Frito business, he said. Mondelez is the snacks and coffee business that remained after Kraft Foods Group Inc. split off last year.

Risky Proposal

PepsiCo doesn't plan to acquire Mondelez, according to a person with knowledge of the matter. Buying Mondelez would be risky for PepsiCo's shareholders because of Mondelez's underperformance and reliance on slow-growth Western European markets, said the person, who asked not to be identified because the company's dealmaking is handled privately.

PepsiCo is also unlikely to split its global beverage business from its global snacks business, this person said.

"We have a strong growth strategy and structure in place, and our results to date and returns to our shareholders prove that we are a high performing company and our strategy is working," PepsiCo said in an e-mailed statement. "We are confident in our ability to deliver long-term shareholder value as an integrated food and beverage company."

Mike Mitchell, a spokesman for Mondelez, said the company "regularly engages in meaningful conversations with its shareholders and looks forward to meeting with Trian to learn about their perspectives in more detail."

Skilled Manager

Peltz praised Mondelez CEO Irene Rosenfeld for being a skilled strategic manager, while criticizing her company's margins and its name.

"The name Mondelez I hate," he said. "It sounds like a disease."

The name is a combination of the word "monde," derived from Latin for world, and "delez," an expression for delicious, according to a press release last year. Kraft asked employees to suggest names, and more than 1,000 participated.

Kraft realized that the pronunciation of Mondelez wasn't easily picked up by everyone, Mitchell said at the time.

"It will take a while to get used to," Mitchell said then. "People will learn how to pronounce it, and it will be good."

PepsiCo may face increased pressure after Peltz's comments and analysis, even though Trian holds less than 1 percent of the company, Jack Russo, an analyst for Edward Jones & Co. in St. Louis, said yesterday in a telephone interview.

"They are clearly going to take it seriously," said Russo, who recommends buying PepsiCo. "I'm sure PepsiCo is pretty outraged he made this public."

Takeover Proposal

The New York-based money manager Peltz co-founded in 2005 disclosed stakes in Mondelez and PepsiCo in April, feeding speculation that he would push to unite the food makers. Relational Investors LLC, run by Ralph Whitworth, and Bill Ackman's Pershing Square Capital Management LP have also disclosed holdings in Mondelez.

Trian later yesterday released an outline of its proposed strategy for PepsiCo, detailing the value of the takeover proposal.

"A separation will create a focused snacks leader positioned to have its trading multiple re-rated as it delivers attractive growth and productivity initiatives that hit the bottom line," Trian said. "We believe the status quo is unsustainable. PepsiCo has significantly underperformed over a prolonged period of time."

Edward Jones's Russo said Trian and Peltz scored several valid points in their analysis. Among them, PepsiCo's earnings growth has fallen short of other consumer staples companies and the snacks business has lost some sales volume as the unit helps fund marketing for a lagging beverage unit, he said.

'Execution Risks'

"Many of us expected some sort of pressure on Pepsi regarding Mondelez, and here it is," Ali Dibadj, an analyst at Sanford C. Bernstein & Co. in New York, said in an interview.

"We've said before that a deal and/or split may make strategic sense in theory for PepsiCo, but the practical execution risks may be too great," said Dibadj, who rates the shares outperform.

Sorkin reported during the interview that Peltz has built a stake in DuPont Co., which spurred the stock to close up 5.3 percent to $57.25 in New York. Peltz declined to comment at least twice on DuPont.

Mondelez advanced 2.1 percent to $30.50 at the close yesterday for a market value of $54.4 billion. PepsiCo rose 1.5 percent to $85.24.

Equity Stakes

Activist funds generally acquire equity stakes in companies and try to force corporate management to make changes that boost share prices and investor returns. Trian last year successfully pushed Ingersoll-Rand Plc (IR) to sell some of its businesses. The Swords, Ireland-based maker of air-conditioning systems and climate-control technologies is spinning off Allegion Plc, the security unit that sells residential and commercial door locks.

In 2006, Trian waged a six-month proxy fight with H.J. Heinz Co. to win seats on the board and persuade management to execute a turnaround plan. Warren Buffett's Berkshire Hathaway Inc. and Jorge Paulo Lemann's 3G Capital Inc. bought the maker of food products from ketchup to infant formula for about $23 billion last month.