Could activist investor Nelson Peltz be at it again? Hot off the heels of one mega-deal in the food industry, the Warren Buffett-led move to take Heinz into private hands, rumours are abound Peltz is building up a stake in Mondelez International and PepsiCo with a view to merging the companies into a snack food Goliath.
According to a report in The Daily Telegraph, which cited sources familiar with the matter, Peltz has gone on a US$2bn buying spree in recent months, building up stakes in Mondelez and PepsiCo.
The news sparked an immediate jump in the share price of both companies, with Mondelez up more than 4% and PepsiCo up a little over 1% just 25 minutes after the opening bell sounded in New York.
PepsiCo has long felt the pressure to spin off its snack and soft drink units. It seems plausible that Peltz (who was instrumental in splitting Cadbury Schweppes) could have this in mind, especially given the recent drag the drinks business has been on PepsiCo’s bottom line.
A tie-up between the snack business of PepsiCo and Mondelez has a strategic logic.
Both Mondelez and PepsiCo see sales growth weighted to emerging markets and each group has signalled it could look to bolt on acquisitions to expand in this arena. A Mondelez-PepsiCo combination would allow the firms to leverage the wider distribution infrastructure in emerging markets, effectively filling in the blank spots on the map. Simultaniously, the enlarged group would be able to boost the profitability of its emerging markets business, where operating is more margin intensive, by extracting synergies.
Moreover, a merger between the two would perhaps serve to calm investor jitters about Mondelez’s reliance on the developing world following the separation of the group from North American grocery business Kraft Foods Group. PepsiCo’s strength in developed markets, which still account for 65% of group revenues, would dilute this risk.
Combining the operations of PepsiCo and Mondelez would also make a lot of sense in terms of product offering, bringing together PepsiCo’s strength in salty snacks with Mondelez’s dominant position in biscuits and confectionery. And, looking at the list of brands that each group commands, it is difficult to see any overlap that would cause insurmountable regulatory hurdles.