US: Analysts mull prospect of PepsiCo split
Analysts on Wall Street have questioned whether US food and drinks giant PepsiCo could also consider dividing itself in two after Kraft Foods announced plans to break up of its business.
In a research note today (5 August), analysts at Sanford Bernstein said PepsiCo "may be closer than ever" to splitting the company bsuinesses focusing on snacks and beverages. The analysts added that they, and most investors, often discuss PepsiCo as a "tale of two companies".
"Given the seemingly changed tone from CEO Indra Nooyi and Kraft's recent announcement, we wonder whether PepsiCo may be closer than ever to splitting up," they speculated.
The analysts said there would be "many options for a breakup" but that one global snacks company (SnacksCo) and one global beverages company (BevsCo) would likely be the best structure given the benefits of shared marketing and technology.
"SnacksCo would be US$33.2bn in sales and $6.2bn in EBIT, while BevsCo would be $36.1Bbn in sales and $4.8bn in EBIT," they noted. "Our updated analysis suggests circa 14% upside for PepsiCo investors if a split were to occur."
Kraft announced yesterday that its plans to split its business in two to create a global snacks company and a North America-based grocery firm.
The analysts added: "We think the recent Kraft announcement and the overlap in purported advisors to both companies (Boston Consulting Group and Centerview Partners), not to mention Kraft CEO Irene Rosenfeld's pedigree at [PepsiCo snacks unit] Frito-Lay, increase the odds of such a split potentially occurring at PepsiCo as well. Of course, for Kraft there was the involvement from respected activist investors (Nelson Peltz and Bill Ackman); perhaps this is something PepsiCo investors may ultimately encounter also."
However, a spokesperson for PepsiCo told just-food that it has no plans to break up the company.
“We would always consider our strategic options but we have a very different portfolio to Kraft and their decision does not change our strategy,” the spokesperson said. “We are comfortable that our business model is right for today and right for moving forward."
Elsewhere, Morningstar analyst Philip Gorham said there were pros and cons of a split for PepsiCo but said it was not "ridiculous" to think that the company could follow the likes of Kraft and US consumer goods group Fortune Brands in pursuing a split.
"There's very little advantage in terms of distribution to owning drinks and snacks. They can't/don't distribute both on the same truck in most markets. It makes sense to combine distribution in some remote markets but the weight and temperature differences for drinks and snacks makes it unpractical in most markets," Gorham said.
However, Gorham said a combined business does give PepsiCo greater bargaining power with its customers. "The advantage to having a combined business, I think, is the leverage it gives Pepsi over retailers and quick service restaurants," he said. "A single supplier for single serve, fountain drinks and snacks can make life a lot easier and give Pepsi some pricing power."
Nevertheless, the Morningstar analyst said a split could provide value to PepsiCo shareholders.
"From the market’s perspective, I suspect that a split would unlock value. The snacks business is great, and has significant competitive advantages in brand equity and distribution, but the stock is being weighed down by the soft drink business. If Pepsi see Fortune Brands and Kraft unlocking value after their splits, it's not ridiculous to think they could follow suit.
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