Dean Best

Best bits: Questions remain over future of PepsiCo, Pringles

By Dean Best | 13 February 2012

"This is an 'and' game and not an 'or' game". It was an unusual choice of words from PepsiCo chairman and CEO Indra Nooyi but one that underlined the company's push into healthier categories would continue as the US food and beverage giant set out a series of measures to improve its growth and quieten criticism from investors.

There has been months of shareholder unrest with speculation growing over PepsiCo's future direction and over Nooyi's future at the company. Investors frustrated at PepsiCo's recent performance have claimed the company has been distracted from its core snacks and fizzy drinks by its ambition to boost sales of healthier products. There has also been talk that PepsiCo could follow US peer Kraft Foods and split in two.

On Wednesday, in a much anticipated announcement, the Lay's crisps and Quaker cereal manufacturer outlined its plans. With an increasing in marketing expenditure, a range of initiatives to improve productivity (which will lead to 8,700 jobs being lost), a hike in its dividend and a share buyback programme, PepsiCo believes it will "strengthen" the company and "enhance shareholder value".

Wall Street analysts, however, questioned whether PepsiCo's plans go far enough. Analysts at Bernstein said PepsiCo's programme was "a few steps forward and a few steps backward" and questioned the level of returns PepsiCo has forecast for the next two years.

However, perhaps the questions over short-term returns were unexpected. As has been argued on these pages before, for the all the frustration at PepsiCo's recent financial performance, by keeping the company intact and by indicating that healthier products remain important to the business, Nooyi has put the group on a path that many see as the right road for the group.

A few hours later on Wednesday, Pringles joined PepsiCo in the industry spotlight after the results of an internal investigation at the company lined up to buy the global snacks brand.

A probe at Diamond Foods uncovered improper accounting at the US snack maker and led the company to announce it would appoint a new CEO and CFO. The investigation into crop payments, which was announced in November, had already delayed Diamond's planned takeover of Pringles, which was agreed last April. And there is now fresh uncertainty over whether the deal will go ahead.

The results of the probe and the planned executive changes at Diamond surprised Pringles owner Procter & Gamble, which said there had been "considerable interest" from other parties in the brand. P&G said it would look at what to do next and insisted it was "keeping all our options open".

Industry watchers doubt whether the deal with Diamond will go through. The April agreement included an insistence from Diamond that its financial statements were accurate. Diamond will now have to restate its financial results for 2010 and 2011. The deal documents are also said to state that changes in Diamond's executive team that could hit the company's prospects represent a material adverse effect to the business.

Which other companies could be interested in Pringles? It is hard to look beyond Kraft, which is creating a global snacks business of its own through its split into two companies. Snyder's-Lance could be another potential buyer, although if Kraft was in the running, the pretzel maker may not be able to match the food giant's firepower.

Sectors: Baby food, Cereal, Dairy, Financials, Snacks

Companies: PepsiCo, Pringles, Kraft Foods, Diamond Foods, Snyder’s-Lance

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