PepsiCo and Unilever are companies that have – for the last two years at least – faced calls to radically change their businesses – be it selling assets, combining with rivals or splitting in two.
Activist investor Nelson Peltz has called on PepsiCo to either combine with Cadbury owner Mondelez International and then split into a food business and drinks company – or simply split in two.
Unilever also enjoys a fast-growing personal care business but is confronted with a sluggish food one. Like PepsiCo, there are some in the investment community that believe the company should, after a series of food asset disposals, think of more radical ways to boost its performance.
Those agitating for PepsiCo to combine with Mondelez appear, for the time being at least, to be left frustrated.
PepsiCo last week reported its half-year numbers and unsurprisingly faced questions about Nelson Peltz’s call for it to come together with Mondelez.
CEO Indra Nooyi sounded exasperated at the questions that came her way from analysts and urged the market to “look beyond the noise” emanating from Peltz’s proposal. CFO Hugh Johnston meanwhile separately said a takeover of Mondelez would be “too risky” for PepsiCo’s shareholders. Pretty clear statements that indicate PepsiCo plans to press on.
The idea of a combined PepsiCo-Mondelez does not sit quite right when you consider the moves Nooyi has made to move into healthier parts of the food industry. PepsiCo’s acquisition of Russian dairy and baby food group Wimm-Bill-Dann two years ago and its new yoghurt venture with Unternehmensgruppe Theo Müller have grabbed the headlines but the company also has a dips and spreads venture, focused on houmous brand Sabra, with Israel’s Strauss Group. Sure, as a percentage of PepsiCo’s turnover, none of these come close to matching the sales of Pepsi cola or Lay’s potato chips but the company has been following a clear strategy of investing in health and wellness. A move for the owner of Dairy Milk and Oreo does not seem to fit despite the disquiet among some investors over PepsiCo’s health kick.
That said, Nooyi did tell analysts last week PepsiCo is working to improve the performance of its North American drinks division and said there could be “structural alternatives” announced early next year. Could the outcome be what Peltz has called his “Plan B” – a split of PepsiCo in two? Of Peltz’s “plans”, that seems the more likely.
Another industry heavyweight almost permanently at the centre of speculation about its future direction is Unilever. The consumer goods giant’s recent acquisitions have focused on home and personal care, its disposals on food. The deal-making has prompted some to wonder what could come next, with spreads often talked about as a potential candidate for sale (a move perhaps not as likely as some suggest) and how committed Unilever is to the food sector.
On Friday, Unilever did announce another disposal, selling B2B assets in Turkey to Swedish ingredients group AAK. The company is also understood to be looking to offload European snack meat brand Peperami and US salad dressings business Wish-Bone.
On Thursday, Unilever CEO Paul Polman said the company would look to further rationalise its portfolio, which suggested the group could make more disposals in food. “If you have more SKUs there are always some SKUs on life support and you know the [UK] National Health Service is becoming pretty expensive,” Polman, in that distinctive way of his, told analysts. He also claimed Unilever’s work had made its food business the “most focused food portfolio of its kind with leading positions globally”.
It is, however, a food portfolio that still prompts some questions in the investment community. “Unilever now owns the world’s fastest-growing major home and personal care business and its slowest-growing foods one,” Investec analyst Martin Deboo wrote last week. “Unilever’s foods presence continues to raise questions for long-term value creation.”
Deboo says Unilever has stated plans to sell more food assets with EUR750m of turnover. However, he added: “We question whether this is radical enough.” In a note issued last week, Deboo set out other options – selling spreads; selling its dressings business; doing both; or sell slash spin-out the entire foods division.
The Investec analyst acknowledges the lack of potential buyers for the spreads business, with Unilever’s competitors in the sector being regional, small or co-operatives. However, he puts forward agribusiness group Bunge as a possible candidate and throws up the possibility the company could team up with private equity.
That said, in the near term at least, a sale of the spreads business is unlikely. It is said to be hugely profitable for Unilever and, although the company has to work hard to improve the performance of the business, particularly in the UK after the Flora recipe debacle, the odds are the company will stick with spreads. Its dressings business, meanwhile, benefits from synergies with spreads, as Deboo acknowledges, and, again, buyers (at the present time) are thin on the ground.
The company has also set out what it sees as cogent reasons for operating food and non-food businesses.
After one delegate at the Consumer Analyst Group of Europe conference in 2012 told Polman operating in both sectors was “old school”, the Unilever boss said the cash from spreads had helped the company expand rapidly in emerging markets. He also argued the “proximity” of the company’s food business to its customers helps its home and personal care operations.
“If you look at a company like ours, the combination of being in food and the proximity to the market that that gives you is a tremendous benefit in the speed we can roll out our personal care business with the local markets. It’s proving to be harder, sharper and more agile than some of the central models that we see from some of our competitors. It comes partly from our food heritage and food business that has a much closer proximity,” he said then.
More disposals do seem to be on the horizon at Unilever. For the time being at least, the transactions are likely to focus on smaller assets. However, more radical options are unlikely for pragmatic reasons. For now, it is more likely Peperami and Wish-Bone – or maybe even a Marmite or a Pot Noodle? – will be the next food asset sales at Unilever.