PepsiCo insists M&A must be "shareholder value-creating"

PepsiCo insists M&A must be "shareholder value-creating"

PepsiCo chairman and Indra Nooyi has outlined the US giant's caution as it surveys opportunities to add more health-focused businesses to its portfolio through M&A.

Speaking to analysts to discuss PepsiCo's third-quarter financial results yesterday (4 October), Nooyi was asked whether the company, which acquired Russia-based dairy group Wimm-Bill-Dann in 2010, would return to looking to build a nutrition-focused business within its wider portfolio.

When PepsiCo bought Wimm-Bill-Dann, the company described the new asset as "a platform-building dairy R&D and manufacturing capability" and talked then about building a business in the "value-added" part of the dairy category. Since then, PepsiCo's only significant move in dairy was the formation of a US yogurt venture in 2012 with German group Muller, a business closed three years later.

On yesterday's conference call, Pablo Zuanic, an analyst at US investment and trading firm Susquehanna International Group, said PepsiCo's subsequent moves on "nutrition" had been made organically within snacks and soft drinks and asked whether it was "maybe a moment to think about that third leg again".

Nooyi said Wimm-Bill-Dann had "performed exceedingly well" and described the business as "an ideal portfolio".

She indicated PepsiCo had been monitoring possible targets but suggested the group was unsure about the returns it could generate from buying those businesses when looking at the values placed on the companies.

"We have to think hard whether they're shareholder value creating, what kind of a premium you pay for any acquisition and how we realise the benefits of that deal enough to offset the acquisition premium. And believe me, the stuff we've looked at so far, we don't see a clear path to that," she said.

"As we've said many, many times to all of you, we want to make sure that any acquisition we make has a clear path to value creation. And if we don't see that, we typically do not make the acquisition. We try to do things organically. It may take longer, but they create much more value over the long-term."

PepsiCo's nine-month financial results showed the company's revenue and earnings grew year-on-year during the period to 9 September.

Looking at the specific numbers PepsiCo provides for its food businesses, the group saw net revenue and operating profit from its Frito-Lay North America increase. The company's Quaker Foods North America business reported a 1% fall in net revenue and flat operating profit.

Reflecting on PepsiCo's performance in the third quarter, Nooyi said: "Each of our operating sectors performance came in on or ahead of expectations with the numbers showing sequential topline acceleration, with the exception of our North American beverages business, where net revenue and operating profit declined.

"Moving on to Frito-Lay North America, we had another quarter of very strong results, with a good balance of volume growth, net price realisation, and operating margin expansion. We feel very good about the business with innovation, pricing, execution and market share performance all on target. We are particularly pleased with the continuing strength in organic sales growth, which is being fueled by effective price pack management and innovation backed by great marketing."

She added: "At Quaker Foods North America, we are pleased with the sequential acceleration in organic volume, organic revenue, and core operating profit performance and we continue to feel positive about the trends in the business. Our activations of portable breakfast innovation, namely Breakfast Flats launched in 2016 and Breakfast Squares that were launched in the first quarter are yielding positive results. And our second quarter launch of Overnight Oat Cups, capitalising on the growing trend of preparing chilled oats using a variety of healthy ingredients is also gaining traction with consumers. Taken together, our innovation and other programming drove mid-single-digit volume growth in our base oatmeal portfolio.

just-food analysis from 2010: PepsiCo ready to milk dairy with Wimm-Bill-Dann buy.