“Round like a circle in a spiral, like a wheel within a wheel. Never ending or beginning, on an ever spinning wheel.”
It is not often you get to quote Dusty Springfield lyrics as a business journalist. But this song plays through my head each time I think about the Peltz-PepsiCo-Mondelez rumours that are causing so much excitement.
Nelson Peltz has been a prominent figure in food investment from long before I cut my first teeth in this industry. And recent events seem to have distinctive echoes of – and roots in – one of the first “big” stories I covered: the spin off of the drinks arm of Cadbury Schweppes.
Back in 2008, like PepsiCo, Cadbury Schweppes had a decent weight to it. At the time, with brands including Canada Dry and Dr Pepper, Cadbury Schweppes was the third-largest soft drinks company in the world behind only Coca-Cola Co. and PepsiCo.
Like PepsiCo, Nelson Peltz pressured the group to break into two units – drinks and snacks. Like PepsiCo, the primary argument underpinning a spilt was a separation could – or did – unlock considerable value for shareholders.
According to Peltz, like the then-Cadbury Schweppes, PepsiCo could potentially see an operational benefit. As a pure-play confectioner Cadbury was able to focus on the task in hand, building from its strong UK-base to develop as a powerhouse in emerging markets.
Trian argues that, while PepsiCo management under CEO Indra Nooyi is entirely capable, it is struggling to balance the needs to two distinct business models – the low-growth drinks business and high-growth snacking unit.
Peltz believes PepsiCo should – at the very least – divide its business into two units, beverages and snacks.
Like a Victorian melodrama, the wheel spins on. Enter stage right Mondelez International.
The break-up of Cadbury Schweppes paved the way for the hostile takeover of the chocolate maker by US giant Kraft Foods, first proposed back in 2009. The slimmed down Cadbury cut a sharp figure with its iconic brands and rapidly expanding presence in emerging markets. A post de-merger cost-cutting programme had got Cadbury profits back on track. And, with a market capitalisation of somewhere around the GBP9bn mark (if memory serves), it was also a digestible size.
The knock-on effect of the Cadbury deal was Kraft faced two distinct business models: a fast-growth emerging markets snack business and a slow-growth US grocery unit. Parallels with PepsiCo?
We all know where this is going. Last year, Kraft spun off into two units: Mondelez International and Kraft Foods Group.
The group separated, but both businesses still face challenges: Kraft Foods Group is grappling with declining volumes in the highly competitive US market while the capital intensive challenge of expanding rapidly in emerging markets has opened Mondelez up to fire from investors who want the group to drive improved returns and higher margins.
The need to drive margins is another argument underpinning the Mondelez-PepsiCo combination proposed by Peltz’s investment vehicle, Trian Fund Management. Peltz, also a sizable Mondelez stockholder, insists that Mondelez needs to pull it’s socks up and start delivering on the bottom line. “I’m not getting any younger,” he told CNBC‘s Delivering Alpha conference last week.
Significantly, in splitting its business and reducing the punch it packs, Mondelez has opened up the possibility it could itself become a takeover target. And PepsiCo is not the only potential bidder.
Coca-Cola has long faced calls to reduce its reliance on the carbonated soft drinks sector – which some fear is in structural decline. Pundits have suggested an acquisition of Mondelez would be one option for the former Cadbury Schweppes adversary as it looks beyond the CSD space.
Wheels within wheels.
For our full analysis of the prospects of a PepsiCo-Mondelez merger click here, or check back tomorrow to for the next instalment of the saga as PepsiCo delivers its first half numbers.