Peltz's Trian Fund Renews Push for PepsiCo Split
Dissatisfied With Company's Efforts, Shareholder Again Urges Breakup of Beverage and Snacks Units
Nelson Peltz's Trian Fund Management LP is renewing its campaign to split up PepsiCo Inc. PEP -1.38%
The activist shareholder backed off in recent months as PepsiCo's management completed what the company called an "exhaustive" strategic review. The results, unveiled last week, didn't satisfy Mr. Peltz. While PepsiCo said it would boost dividends and stock buybacks by 35% this year, it stayed firm on largely conducting business as usual.
Turning up the heat, Trian sent a 37-page letter to PepsiCo's board of directors Wednesday outlining why it still thinks the snack and drink behemoth should spin off its struggling beverage business.
Trian, which says it owns roughly $1.2 billion in PepsiCo stock it amassed last year, also informed PepsiCo directors it will begin meeting with shareholders "immediately" and might conduct public shareholder forums as it tries to galvanize investor support for a breakup of the maker of Lay's potato chips and Pepsi-Cola.
Nelson Peltz AP
"If the plan is the status quo, that's an unacceptable plan," Mr. Peltz said in an interview.
PepsiCo said in a statement Wednesday night that management and the board "have spoken clearly" against a split and remain fully aligned. "Our focus is on delivering results for our shareholders, not new, costly distractions that will harm shareholder interests," it added in response to Trian's letter.
PepsiCo directors told Mr. Peltz in a meeting late last year that the board backed management's opposition to a split, according to people familiar with the matter.
Trian published a "white paper" last July urging PepsiCo—which has a stock market capitalization of $118 billion and booked $66 billion in revenue last year—to spin off its underperforming beverage business and acquire Mondelez International Inc. MDLZ +0.20% to create a global snacks powerhouse.
Mr. Peltz halted his merger push last month after failing to gain traction but secured a board seat at Mondelez, whose brands include Oreo cookies and Trident gum. Until now, he has also failed to win enough support to split up PepsiCo, whose brands also include Quaker oatmeal, Tropicana juice and Gatorade sports drinks.
But the influential investor is betting more PepsiCo shareholders will join him if the company's beverage business keeps losing market share to rivals like Coca-Cola Co. PepsiCo said last week its beverage volume rose 1% in the fourth quarter, compared with 3% for snacks. Operating profit at its troubled Americas beverage unit fell 10% as North American soda volumes dropped by a mid-single-digit percentage.
In its letter to PepsiCo directors Wednesday, a copy of which was reviewed by The Wall Street Journal, Trian said PepsiCo has underperformed peers in stock price, operating margins and earnings growth. It calculated that since Chief Executive Indra Nooyi took over in October 2006, PepsiCo shares have a total return including dividends of about 47%, less than half that of Coke and the broader index of consumer staple stocks.
"We believe the best way to ensure improved performance at PepsiCo is to separate global snacks and beverages, putting the future of each business in the hands of empowered and focused management," the letter states.
Mrs. Nooyi has repeatedly said PepsiCo's beverages—which generated 48% of company revenue last year—give the company critical leverage around the globe, lowering costs and increasing clout with retailers.
Separating snacks and drinks "loses significant synergies," Mrs. Nooyi told analysts in a conference call last week. She added "there wasn't a stone" unturned during management's "exhaustive" yearlong strategic review, which included consultants and bankers.
But Trian says the company's faster-growing and more profitable snacks business has been hamstrung by subsidizing beverages.
It also says PepsiCo has made several missteps in its beverage business to cede ground to Coke, which has been more nimble in introducing new products in recent years.
Mr. Peltz also says Mrs. Nooyi told him last fall that PepsiCo made a "mistake" in buying its two largest U.S. bottlers in 2010 but that she had made the move because the bottling system was in "disarray."
PepsiCo paid $7.8 billion for the two bottlers.
Trian says it isn't pushing for the ouster of Mrs. Nooyi, who is also PepsiCo's chairman. "This is not about Indra Nooyi. This is about the structure of the company," Ed Garden, Trian's chief investment officer, said Wednesday.
Breaking up companies has been a common theme for activist shareholders recently, who have targeted ever-larger companies for such pushes. This year activists are also seeking to split Dow Chemical Co. and eBay Inc., though the companies are resisting such suggestions.
Many companies are rebuffing the pushes to split and arguing that being bigger brings cost savings and helps customer relationships. Moody's Investors Service, a credit-ratings firm, has raised questions that several suggested splits could put separated companies at risk of having too much debt.
Trian has been among the activists most successful in splintering conglomerates and has been long associated with maneuverings of food and beverage companies in particular.
Trian regularly argues that separating management teams can force them to improve operations or lose to rivals.
Mr. Peltz agitated at Cadbury PLC and pushed it to separate Dr Pepper Snapple into a separate company in 2008, a split that came years after his own company had sold Snapple to Cadbury.
Then, Cadbury was bought by Kraft Inc. in 2010, only to have Trian and other shareholders pressure Kraft into splitting in half in 2011. The Kraft split created Mondelez.
In 2006, Trian waged a heated proxy fight, and won board seats, at ketchup giant H.J. Heinz Co., which last year sold to private-equity firm 3G Capital and Warren Buffett's Berkshire Hathaway Inc.
Trian is also pointing to Pepsi's past spinning off what's now Yum Brands Inc. as evidence breaking up can work.
***