After a stronger than expected year in an increasingly difficult environment for peddlers of carbonated soft drinks, the management of PepsiCo Inc. brushed aside the demands of pesky shareholder Nelson Peltz to split its beverage and snack-food arms into separate companies.
PepsiCo is wrong to dismiss its biggest critic. Its stock price has languished over the past year in the midst of a bull run for U.S. equities. Its promises of greater operating efficiencies, more aggressive share buybacks and a 15-per-cent increase in dividends are steps in the right direction, but will not be enough to dissuade Mr. Peltz, a billionaire corporate raider reborn as an activist investor, from pursuing his campaign to break the huge global company into two.
After being consistently rebuffed since broaching the idea last year, Mr. Peltz has decided to take his case directly to his fellow shareholders, making public a detailed letter to PepsiCo's board that explains why it makes more sense to spin off the slower-growing beverage operations from the higher-margin snack foods. In the letter, Mr. Peltz makes a convincing case that both operations would do better as standalone entities with focused managements able to operate more nimbly and effectively without PepsiCo's bureaucratic holding company structure.
PepsiCo disagrees. After finishing what it described as an "exhaustive" review of its options, The company declared last week that it makes more sense to keep snacks and drinks together in an integrated operation that provides more clout in dealing with retailers, offers greater efficiencies of scale and enables the company to better exploit technological breakthroughs, such as new sweeteners.
But if those arguments have merit, the advantages they detail should already be reflected in superior performance – and they're not. In his letter, Mr. Peltz expresses dismay with the beverage giant's "extended period of underperformance relative to its food and beverage peers. The deteriorating trends in North American beverage, questionable quality of earnings in 2013 and disappointing 2014 guidance reinforce our view that now is the time for decisive action."
Mr. Peltz, who heads Trian Fund Management LP, whose funds own about $1.2-billion (U.S.) worth of PepsiCo shares, had earlier campaigned for a merger of Pepsi's snack division with Mondelez International Inc. (the old Kraft food business), another Trian shareholding. But he stopped those efforts last month when he won a Mondelez board seat.
On the beverage side, Pepsi faces many of the same pressures as larger rival Coca-Cola and other soft-drink heavyweights – declining sales in the critical U.S. market of soda pop(whether sweetened with sugar or no-calorie additives), falling margins in the face of steep price cuts and growing concerns that authorities will impose tough sugar regulations to cope with an epidemic of obesity, diabetes and other health problems.
But Mr. Peltz, a long-time investor in beverage and food businesses, insists Pepsi is in bigger trouble because it has lost its innovative edge and is consistently outmanoeuvred by Coca-Colain terms of new products and packaging. Which in Pepsi-land is really hitting below the belt.
Some analysts question whether a split is in shareholders' long-term interests, as Mr. Peltz insists, or merely suits the shorter-term agenda of most speculators. But what no one can dispute is that PepsiCo has been a laggard for several years. The fact the share price rose after Mr. Peltz signalled his intention to take his cause to fellow shareholders ought to tell the company that boosting dividends and buybacks won't be enough to restore faith in its game plan.