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