PepsiCo has shrugged off a call to break up the business and merge its food operations with Mondelez International, insisting the company does not need large-scale M&A to deliver its long-term targets.
Speaking during a conference call today (24 July), PepsiCo CEO Indra Nooyi urged the market to “look beyond the noise” surrounding pressure from activist investor Nelson Peltz to radically shake-up the company.
Through his investment vehicle, Trian Fund Management, Peltz has suggested PepsiCo is at a “strategic crossroads” that sees the group struggling to balance the investment needs of its high-growth food division and its low-growth drinks unit. The activist investor has suggested PepsiCo should be broken in two, with the potential acquisition of Mondelez being used to bulk up the emergent pure-play food firm.
However, Nooyi said: “PepsiCo is an extremely well architected portfolio geographically. From a product perspective, we are hitting our stride. Every part of the business is functioning well and we do not need large scale M&A to deliver on our financial goals.”
While Nooyi did rule out Peltz’s suggestion PepsiCo should acquire Mondelez in a deal valued at more than US$60bn, she added the company was looking at bolt-on M&A opportunities.
“We do have a strategy to focus on tuck-in acquisitions. We’ve said tuck-in acquisitions in any year will be US$500m or less. And that’s all we are focused on.”
Management was also quick to emphasise PepsiCo is positioned to deliver strong shareholder returns on a “sustainable” basis.
In the near-term, PepsiCo reiterated it is “on-track” to deliver its full-year financial target, which includes EPS growth of 7%.
“As we look beyond 2013, we believe we’re positioned well to deliver our long-term financial goals which we believe will translate top tier shareholder returns on a sustainable basis,” Nooyi added.
PepsiCo is stepping up investments in marketing and innovation to drive top line growth. Second-quarter organic revenue was up 4.1%, the group revealed earlier today.
With sales growth weighted to emerging markets, the company is also working to revitalise its North American beverages and Quaker units, which could potentially include “structural alternatives” to improve margins in North American beverages, Nooyi revealed. The company plans to update the market in early 2014, she added.
Increased level of investment is being underpinned by margin improvements, the company suggested. The group reported a 120 bps improvement in second-quarter margins.
According to Janney Montgomery Scott analyst Jonathan Feeney, the investment is key to PepsiCo’s “gradual” improvement in revenues.
“With maintained reinvestment despite stiff macro headwinds, PepsiCo continues to show gradual progress in volume and cash flow,” he wrote in an investor note.
However, Feeney sounded a note of caution on the group’s lonf-term outlook: “The question will be whether the raised level of expense investment is enough to fix what had been years of under-investment vs. its key competitor.”
For further analysis of Peltz’s proposals – and whether or not PepsiCo is likely to act on them – click here.