Pepsi, What’s Next?

Shares of PepsiCo (PEP) opened high and climbed 3.27% last Friday. The stock was hovering near its 52-week high.

What caused the jump?

Six hours before the New York market opened, the Telegraph reported that Nelson Peltz' Trian Management Fund had been building stakes in excess of $2 billion in both PepsiCo and Mondelez.  And, the size of the holdings under the activist investor's control could be even larger, when taking the special purpose vehicles of other investors into consideration. 

Nelson Peltz is well known as a daring and risk-taking investor who likes strategic change and takes on company boards.  Peltz has a history of making large acquisitions in the food industry and then forcing change from within.

What does this mean for Pepsi?

Peltz may push for a $170 billion merger between Pepsi and Mondelez, for PepsiCo to spin-merge, or for neither.

The effects of a merger would be significant, consolidating distribution networks could result in cost savings of $3.4 billion.  A merged company would benefit from distribution and production synergies, and would broaden regional access for both companies.

However, both companies have been strong performers in the market over the last year and would not want to undergo a major M&A, and a major merger could present antitrust concerns.  Additionally, Mondelez has an array of individual products that could be too complicated "to appeal to a larger suitor at this time," JP Morgan analyst Ken Goldman says.

A spin-merge may be another option that would address antitrust concerns while still taking advantage of the benefits of a merger.  Goldman Sachs’ analyst J. Hong has suggested that the most likely strategy would involve splitting PepsiCo into three focused companies (Beverages, Snacks, and Nutrition), and then merging the New SnacksCo with Mondelez.

Why would Pepsi not want to merge or split? 

A  merger between PepsiCo and Mondelez seems to be reasonable, and has even been called a “big snack deal.” 

Chief Officer Hugh Johnston of Pepsi argues that, "We certainly wouldn't want to make a change in the business structure while there's still opportunities to unlock value."  PepsiCo previously fended off calls from investors and industry analysts arguing that it benefited from scale and embarked instead on a restructuring of its struggling beverage unit.

Last month, Pepsi revealed a stronger-than-expected 17% jump in fourth-quarter profits. The turnaround plan worked, and Pepsi is predicting the earnings will climb up 7% this year with the launch of the redesigned beverage packaging, improved mid-calorie Pepsi Next, movement into the energy drink market, and a new all-natural sweetener.

What is Peltz thinking?

It’s possible that Peltz has no intention of pushing for a merger.  Peltz has previously invested large amounts in companies without then pushing for large changes.  PepsiCo is projected to continue doing well and would be a wise investment, and Peltz already owned a significant stake in Mondelez as a result of his previous Cadbury acquisition.

Another possibility is that Peltz is much more interested in the effect this could have on Mondelez than that which it could have on PepsiCo.  Already an owner in Mondelez with a demonstrated interest in snacks - in 2007 he acquired 3% of Cadbury before pushing it to merge with Kraft and then pushing for a split into Kraft and Mondelez - he would benefit from a merger between Mondelez and a Pepsi-Snack-split company.  He may be convincing enough to strong-arm Pepsi into a future split.

What does this mean for Pepsi’s stock?  Will the stock price continue to go up or it will turn around?

Morgan analyst Ken Goldman warned that everyone should take Peltz’s potential interest seriously, but retail investors should keep in mind that there are many players in the pool.  At the end of the fourth quarter, a handful of key hedge fund managers had increased their stakes on PepsiCo.

If we look at the market response recently, we see that the stock price has gone up and down after the news broke out last Friday. The most significant changes occurred on Friday, with the stock jump, and yesterday, with a big drop of the stock price.  Investors clearly responded to this news. 

Why the drop?

It is both possible that some people took this chance to maximize their profits and sell their stocks, moving their money away while the price was high.

Big money may be playing its game – they’re preparing for a higher price, but before that, they need to press down the price and scare some people away.

But prices in both stocks are still on the rise.

References:

http://beta.fool.com/mhargra/2013/03/27/billionaire-nelson-peltz-is-pushing-together-monde/28201/

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9947125/Nelson-Peltz-plots-112bn-Cadbury-merger.html

http://www.streetinsider.com/Analyst+Comments/Inside+a+Potential+Pepsico+%28PEP%29+Split/8211753.html

http://www.streetinsider.com/Analyst+Comments/Inside+a+Potential+Pepsico+%28PEP%29+Split/8211753.html

http://www.nj.com/business/index.ssf/2013/03/pepsi_downplays_rumors_about_m.html

http://www.nj.com/business/index.ssf/2013/03/pepsi_downplays_rumors_about_m.html

http://blogs.barrons.com/stockstowatchtoday/2013/03/22/mondelez-pepsi-pop-on-peltz-positioning/

http://blogs.barrons.com/stockstowatchtoday/2013/03/22/mondelez-pepsi-pop-on-peltz-positioning/

http://www.huffingtonpost.com/huff-wires/20130322/us-pepsico-mondelez/?utm_hp_ref=business&ir=business

http://www.huffingtonpost.com/huff-wires/20130322/us-pepsico-mondelez/?utm_hp_ref=business&ir=business

http://articles.chicagotribune.com/2013-03-21/business/sns-rt-us-peltz-pepsicobre92l02y-20130321_1_activist-investor-peltz-trian-fund-management-mondelez

http://articles.chicagotribune.com/2013-03-21/business/sns-rt-us-peltz-pepsicobre92l02y-20130321_1_activist-investor-peltz-trian-fund-management-mondelez

http://en.wikipedia.org/wiki/Nelson_Peltz

http://en.wikipedia.org/wiki/Nelson_Peltz

http://www.insidermonkey.com/blog/pepsico-inc-nysepep-are-hedge-funds-right-about-this-stock-98383/

http://www.insidermonkey.com/blog/pepsico-inc-nysepep-are-hedge-funds-right-about-this-stock-98383/

http://www.insidermonkey.com/blog/mondelez-international-inc-mdlz-here’s-why-you-should-put-pepsico-inc-pep-in-your-portfolio-96821/

Cyprus Turmoil

The week of 3/18 - 3/22 started off slow but finished with near all-time stock closing price highs as well as a potential banking crisis looming.  Oracle (ORCL) shares dropped over 10% following their forecast of declining revenues to come.  This forecast is coming from their Q3 revenues that were just released and showed a decline.  S&P 500 (SPX) reached an almost all-time closing high at $1,565 but gains were halted due to the uncertainty with the situation in Cyprus.  FedEx (FDX) shares fell this week despite a 4% increase in market shipping volume.  FedEx relies heavily on their air trade while increasing fuel costs have caused consumers to find other methods such as trucks and ships.  Hewlett-Packard (HPQ) re-elected their board of governors despite some calling for new members.  The board announced 10% in dividends paid going forward, which could cost as much as 100,000 per year.  Dell (DELL) stocks jumped Monday morning, 3/25, following 2 buyout offers over the weekend.  The Blackstone group offered around $13.65 while Carl Icahn offered $15; stocks gained 2.6% following this news.  The following graph is the returns for the past week for the stocks we have analyzed plotted on the returns of S&P 500, not show in the key:

BlackBerry’s (BBRY) stock took a fall at the end of last week in response to the “disappointing” launch of the new Z10, BlackBerry’s competitor with the well-known iPhone (Apple: AAPL) and Galaxy (Samsung).  The lack of enthusiasm among AT&T and Best Buy sales personnel drove stock prices down nearly 8% on Friday.  Analysts at UBS that made their way to multiple store locations noticed a trending theme of limited interest in the device, ample stock, and minimal shelf space.  MarketWatch.com lowered the Z10’s success rate to 20%, down from thirty.  Goldman Sachs lowered BlackBerry to a neutral rating but urge that BlackBerry should remain on watch since the device is going through a staggered launch that will end by next week; Verizon is launching the Z10 on Friday. BlackBerry will also be releasing their 4th quarter results on Thursday, so BlackBerry should stay on the radar through next week.  

This past week ended with a lot of uncertainty as to what would happen with Cyprus and their banking crisis.  This small economy is suffering a banking crisis due to Greece defaulting on their debt and since Cyprus banks were heavily invested in this, their losses caused a lack of capital.  Currently the Cypriot banks are being kept afloat by the European Central Bank, but the European Union is pushing for Cyprus to come up with €6 billion in funds to match €10 billion provided by the IMF.  Cypriot banks were initially unsure of how to fund this and came up with a plan of a broad tax on all deposits under €100,000 of 6.6%.  Public outrage to this plan has provided a situation capable to producing a run on their banks.  Loss of confidence in the banks, as well as the potential tax on their deposits causes individuals to want to withdraw their funds from their accounts.  Cyprus’ government imposed a banking holiday to stop individuals from causing a run on banks; this holiday is set to last until Thursday.  If the ECB had withdrawn its support, Cypriot banks would collapse and the 17 member Eurozone would’ve moved into uncharted waters; Cyprus has been using the Euro for 5 years now.  If smaller countries like Greece and Spain were to abandon the Euro, surrounding countries could face bank runs on their deposits and the Eurozone would dissolve.

Early Monday morning, Cyprus and the EU agreed to a bailout deal with promises to aggressively cut back its oversized banking sector.  Cyprus must now raise nearly €6 billion and will do so by forcing losses on large deposits over €100,000.  Cyprus must also shrink its banking sector, which includes restructuring Laiki and supporting the Bank of Cyprus.

Russians use and have been using Cyprus as a major financial center, due to a number of treaties and lower costs.  The island is also used as a jurisdiction for new Russian businesses.  The Cypriot relationship with Russia has lead to large Russian deposits in Cypriot banks.  Russian depositors should now strongly consider withdrawing funds with the new agreement in place.  

Citations

http://blogs.marketwatch.com/thetell/2013/03/22/what-will-actually-happen-if-cyprus-deal-fails/

http://www.marketwatch.com/story/fedex-caterpillar-reports-raise-red-flags-2013-03-20

http://money.cnn.com/2013/03/23/news/economy/cyprus-endgame-eurozone/index.html?iid=SF_E_LN

http://www.businessweek.com/articles/2013-03-25/cyprus-bailout-may-spare-russias-oligarchs-but-hurt-russian-companies

http://www.marketwatch.com/story/stocks-to-watch-blackberry-to-remain-in-spotlight-2013-03-25

http://www.marketwatch.com/story/dell-yahoo-boost-techs-blackberry-falls-2013-03-25?link=MW_pulse

Stanford Ponzi Scheme & The Blackstone Group

Stanford Ponzi Scheme

            In 1991 Allen Stanford founded the Stanford International Bank on the island of Antigua.  This was the beginning of an 18-year, $7 billion Ponzi scheme that deceived tens of thousands of investors.  Within three years, Stanford’s Bank had acquired $350 million in assets by targeting wealthy Latin Americans that were worried about the stability of their own governments.  The corruption was so deep between Stanford’s bank and government officials that the chief banking regulator of Antigua singed a blood pact with Stanford.  Following the start of his scheme in Antigua, Stanford returned home to Houston, Texas to form the Stanford Financial Group, where the group would gain the trust of investors to put their money into certificate of deposits.  The investments made into the deposits were identified by the financiers in the group as offering rates of return of 3-4% higher than those offered by the United States government. In less than a decade, the group amassed $3 billion from the fake CDs, where Stanford himself was taking the investments and using them for his personal ventures in businesses and real estate. This led to Stanford living a lavish life well beyond his means and he became a target of the SEC in the late 2000s, even though they had been tipped off back in 1997 about his shady business practices.

            In 2009 Stanford was arrested and sentenced in 2012 to 110 years in prison, essentially lifetime imprisonment, for 13 counts of fraud, conspiracy to launder money and conspiracy to obstruct justice. Currently, the frozen assets in Canada, United Kingdom, and Switzerland are in the process of being freed up after a settlement between receivers in Antigua and the United States. This could lead to partial return of $300 million in assets, however, there is an ongoing dispute involving the SEC because the U.S. receiver has yet to return any of the invested money to the victims, while $100 million in fees has already been accounted for. The hope is for around 90% of the assets to be returned to the victims, understanding that tracing the money back and compensating those who invested is an intricate puzzle to solve.

The Blackstone Group

            The Blackstone Group is one of the largest financial advisory and investment firms in the world.  The currently preserve $210 billion in assets for public/corporate pension funds, academic, cultural and charitable organizations, and much more.  The group was founded in 1985 and they completed their IPO in June 2007.  Since 2007, Blackstone stocks have been praised for its safety due to their diverse portfolio of private equity, real estate, credit and hedge funds.  Most recently, the Blackstone Group has made a push to broaden their reach in the real estate market. 

            Currently, Blackstone is the largest institutional investor in US housing.  Since 2012, they have spent $3.5 billion to buy up 20,000 homes at depressed prices.  Housing prices are 30% below their peak rights.  This week they increased their credit line to $2.1 billion.  Their current credit line is back by a syndicate of US banks led by Deutsche Bank.  Many investors believe that Blackstone’s move into the housing market with this line of credit is very risky.  However, as you can see from the graph below, the market disagrees.  Blackstone stocks have been climbing over the past 3 months.

Many other investors are making the move into the housing market like Blackstone.  JP Morgan Chase estimated that market for single-family homes is $1.5 trillion.  Only time will tell how the future of institutional investors in the housing market and the risk that comes with it.  Some have predicted the formation of secondary market of securities to bundle home rentals in order to pass the risk on to the investors. 

The Market

            The Dow Jones has continued its upward climb to a 9^th consecutive up day.  This is the best streak since 1996.  Some people believe that we are currently riding on a speculative like the mid 90s when Greenspan gave his “irrational exuberance” speech.  Bernanke disagrees and has continued to make statement to build higher confidence in the market.  

Work Cited

· žhttp://www.ft.com/cms/s/0/d96edbfc­8bfb­11e2­8fcf­00144feabdc0.html

· žhttp://www.ft.com/cms/s/0/e6870092­8b53­11e2­b1a4­00144feabdc0.html

· žhttp://www.ft.com/cms/s/0/17793c5c-­8bda-­11e2-­8fcf-­00144feabdc0.html

· žhttp://www.cnbc.com/49276842

· žhttp://money.cnn.com/2013/03/13/investing/stocks-markets/index.html

Porsche & Volkswagen Relationship

Market Update:

This past week has continued the stock market optimism. It has seen the VIX drop back near historical lows, showing low downside volatility; and the 10 year US yields hitting new year highs, showing the movement of money into the markets and away from “safe haven” treasuries. In addition, people are watching the newly appointed BOJ governor, Kuroda, who is expected to pursue aggressive monetary policy. In Europe, Italy’s debt was further downgraded by Fitch and Mooney. One negative sign did come out of the weekend, as China’s retail sales and industrial output had the weakest start since 2009, creating worries over a possible economic slowdown. In Washington, a budget deal has yet to be made, and the sequester period continues.

Porsche and Volkswagen Relationship, Trials Moved:

 In March 2007, Porsche bough 31% of Volkswagen stock by using cash settled options. Porsche said they did this to ensure that Volkswagen was not taken over by rival car companies, or investment firms, because there was speculation around that time of a possible takeover of Volkswagen. But there is a German law that protects Volkswagen from any takeovers, by allowing any shareholder with more than 20% of the voting rights, to have veto power over any corporate decision in the annual general meeting.

Buying all of this Volkswagen stock, Porsche was able to record recorded profits. Only 1 billion euros of their profit came from selling cars. While 6.8 billion euros of profit came from trading stocks. At that time they were taking a huge amount of risk by only limiting their portfolio to primarily only one stock. But while other companies needed bail outs during the recession, Porsche was able to continue its profits. But in March 2008, Porsche stock took a drastic dive when they announced that they were going to increase their stake in VW to more than 50%.

 In 2009 the tables began to turn as Volkswagen, began buying the crippled Porsche stock. Throughout that year, Volkswagen would acquire 49.9 percent of Porsche stock, at a cost of 3.9 billion Euros. In 2012, Volkswagen announced to buy the remaining shares of Porsche for a price of 4.5 billion euros, but were also forced by regulators to assume 2.5 billion of Porsche’s debt. The deal was structured with the transfer of a single share, to allow for it to be classified as a reorganization, allowing for a loophole in Germany taxes. This tax aversion is still a matter of debate in Germany.

 This past week, the Porsche corruption was brought back into the focus, as 26 global Hedge Fund companies have dropped their NY Supreme Court filing against Porsche for an amount of $1.4 billion , arguing they cornered the VW stocks. However, the same hedge funds have kept their filing on the same issue in the German courts.

Looking back, we see a major dip in both VW and Porsche’s stock prices during the recession of 2007 and 2008. However, in Porsche we see an additional drop due to its excessive risk taking in VW’s stock. Since the recession, VW has done well seeing great growth, and reported in late February record 2012 profits of $16 billion, higher than all other automakers. On the other hand, Porsche stocks are still near lows, even following successful growth in the past year.


Links: http://www.nytimes.com/2012/02/25/business/global/volkswagen-reports-record-profit.html?_r=0 http://www.reuters.com/article/2013/01/31/us-porsche-lawsuit-us-idUSBRE90U18420130131 http://www.businessweek.com/news/2013-03-06/porsche-appeal-by-hedge-funds-dropped-for-case-in-germany http://press.porsche.com/news/release.php?id=451 http://www.huffingtonpost.com/2012/07/04/volkswagen-porsche-merger-vw_n_1649854.html

Herbalife- Who wants to be a millionaire?

 In December 2012, William Ackman CEO of the $12 billion hedge fund, Pershing Square Capital Management presented claims about Herbalife, publicly in a 3 hour power point presentation. Simply, Ackman claims that Herbalife is a pyramid scheme. Specifically, the CEO Michael Johnson presents consumers with a "business opportunity" to buy and distribute Herbalife products. Herbalife promises buyers they can generate a large income by distributing their products. However, they have to recruit others to join their team in which they pay royalties to the people above them.  It is a continuing cycle. There is more money at the top than at the bottom, and not enough at the bottom to be close to what Herbalife tells its distributors. 

     So here are some of Ackman's claims:

• Herbalife's statement of Average Gross Compensation of U.S. Supervisors and other recruiting materials are materially deceptive. 
• Herbalife distributors experience an abnormally high failure rate
• Taking all expenses into account, including the cost of the "business method" materials  the substantial majority of distributors lose money
• If distributors wish to achieve financial freedom, they must recruit
• Herbalife makes its money of recruitment, not it sales (Pyramid Scheme, if true)

Plenty more of the accusations can be found at http://factsaboutherbalife.com/wp-content/uploads/2012/12/Final-Exec-Summary-1.pdf

• For the record, William Ackman set up this website. The powerpoint he presented and all relevant information he uses can be found here. 

Now, Bill Ackman owns a large stake in the Hebalife. He publicly declared he is shorting the Herbalife stock a billion dollars. Ackman has a target price for the stock of zero, which will in turn shut the company down.

As a result of these accusations, Michael Johnson has fired back. He called for an investor day in which he claims Ackman's data inaccurate and outdated. Furthermore, many other big hedge fund owns such as Daniel Loeb have decided to long the stock. Loeb has an 8.2% stake in the company.  Carl Ichan has also supported Herbalife.  The stock has rose and currently is declining.

In addition, last week Herbalife recalled its nutrition shakes manufactured during a specific timeframe because they may contain trace amounts of milk products, the shakes are supposed to be dairy free.

So here is an image of the stock for the month of February. 

As you can see, the stock has dropped dramatically since the beginning of February. Earlier in February, stocks were down 20% since a recent argument between Ackman and Icahn.  Reutuers reports, "A short squeeze could be particularly punishing for Ackman's Pershing Square, which has shorted some 20 million shares of Herbalife. That accounts for roughly 56 percent of the shares sold short, according to January 15 data released by Nasdaq."(http://www.reuters.com/article/2013/02/06/us-hedgefunds-herbalife-shortsqueeze-idUSBRE9150HC20130206).

Lastly, Herbalife claims Bill Ackman is performing market manipulation. He believes by Ackman going public with these claims, he will legally be able to manipulate the market by a group of short sellers.However in support of Ackman, A Belgium court has ruled Herbalife to be an illegal pyramid scheme. They are appealing. Also, the SEC has stepped in and is closely looking at the information available.