PepsiCo Snacking on Mondelez Appeals to Holders: Real M&A

PepsiCo Inc. (PEP) and Mondelez International Inc. (MDLZ) shareholders are wagering that salty and sweet are better together.

Shares of both companies have surged more than 8 percent in the last month to new highs amid bets that activist investors Nelson Peltz and Ralph Whitworth will push for a combination of the makers of Lay’s potato chips and Oreos. Sanford C. Bernstein & Co. estimates that a tie-up of Purchase, New York-based PepsiCo and Deerfield, Illinois-based Mondelez would reduce manufacturing, distribution and marketing costs by as much as $3 billion and create a “snacking powerhouse.”

Mondelez, the $56 billion cookie and candy maker split off from Kraft Foods Group Inc. (KRFT) last year, may command more than $35 a share in a takeover, shareholder Villere & Co. said. That would rank as the biggest deal in the food and beverage industry, according to data compiled by Bloomberg. Gamco Investors Inc. also said it would support a sale to PepsiCo, whose $7 billion of cash and investment-grade credit rating give it the firepower for an acquisition. Buying Mondelez would boost earnings at PepsiCo, which would likely spin off its slower- growing beverage unit, said Stifel Financial Corp.

Photographer: Daniel Acker/Bloomberg

Mondelez has the No. 1 position in the $80 billion market for cookies and crackers with its Oreo, Ritz, Wheat Thins and Nabisco brands, according to Ali Dibadj and Alexia Howard, analysts at Bernstein in New York. Close

Mondelez has the No. 1 position in the $80 billion market for cookies and crackers with... Read More

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Photographer: Daniel Acker/Bloomberg

Mondelez has the No. 1 position in the $80 billion market for cookies and crackers with its Oreo, Ritz, Wheat Thins and Nabisco brands, according to Ali Dibadj and Alexia Howard, analysts at Bernstein in New York.

“They could repackage the company as a pure-play snacks company,” Kevin Dreyer, a money manager at Rye, New York-based Gamco, which oversees $36.4 billion, said in a phone interview. “It would be a very powerful combination and probably lead to considerable synergies between the two companies.”

Dreyer co-manages the Gabelli Asset Fund (GABAX), which has beaten 90 percent of rival funds in the past five years and owns PepsiCo and Mondelez shares, data compiled by Bloomberg show.

Holding Talks

Anne Tarbell, a spokeswoman for Peltz’s Trian Fund Management LP, declined to comment on the firm’s plans for its stakes in PepsiCo and Mondelez, which were disclosed in a filing on April 19.

“In recent weeks, we have held meetings with Trian to discuss and consider their ideas and initiatives as part of our ongoing evaluation of all opportunities to drive long term growth and shareholder value,” PepsiCo said in a statement the day the stakes were disclosed. Jeff Dahncke, a spokesman for PepsiCo, declined to comment further.

Michael Mitchell, a spokesman for Mondelez, said in an e- mail that the company “has created significant value” since its separation from Kraft and is focused on leveraging its brands and global presence “to deliver top-tier financial performance and enhance value for all our shareholders.”

Tie-Up Bets

Shares of both PepsiCo and Mondelez (MDLZ) have risen since Trian’s stakes were first reported in the Daily Telegraph on March 22, and each touched all-time highs this week. PepsiCo (PEP) closed yesterday at $82.82, while Mondelez ended at $31.68. Investors are wagering that Peltz may agitate for a Mondelez- PepsiCo tie-up the same way he pushed for change at other food and beverage companies including Kraft and H.J. Heinz Co. Warren Buffett’s Berkshire Hathaway Inc. and 3G Capital agreed in February to acquire ketchup maker Heinz for $23 billion.

“Now that Peltz owns stakes in Mondelez and PepsiCo, the thought is that history could repeat itself,” Jonathan Feeney, a Philadelphia-based analyst at Janney Montgomery Scott LLC, said in a phone interview. “There are a lot of big funds out there that need to put money to work.”

Today, PepsiCo shares fell 0.4 percent to $82.51, while Mondelez climbed 0.4 percent to $31.56.

Whitworth of Relational Investors LLC, another activist firm, supports Peltz’s effort to combine the companies and bought a stake in Mondelez, a person familiar with the matter said last week. Relational, which owned 7.6 million PepsiCo shares as of Dec. 31, has since sold down that stake at a gain, the person said.

Nabisco, Cadbury

Pershing Square Capital Management LP, the hedge fund run by activist Bill Ackman, also has a stake in Mondelez, according to data compiled by Bloomberg.

Anna Cordasco, a spokeswoman for Relational, didn’t return a phone call seeking comment. Ackman didn’t respond to a request for comment.

Mondelez has the No. 1 position in the $80 billion market for cookies and crackers with its Oreo, Ritz, Wheat Thins and Nabisco brands, according to Ali Dibadj and Alexia Howard, analysts at Bernstein in New York. It’s tied with closely held Mars Inc. in the $190 billion market for chocolate, candy and gum, the analysts wrote in an April 22 report. The $130 billion salty-snacks industry is led by PepsiCo, which owns Lay’s, Doritos and SunChips, the report said.

Welcome Move

Both Mondelez, with its separation from Kraft’s North American grocery unit, and PepsiCo have been focusing on increasing sales in emerging markets, which Dibadj and Howard estimate account for about 40 percent of snack food sales.

“The combined entity would just dominate the snack foods category,” Sandy Villere III, who manages the $500 million Villere Balanced Fund in New Orleans, said in a phone interview. “It’s something that would be welcomed by shareholders.”

The fund, which owns shares of Mondelez, has outperformed 99 percent of rival funds in the last three and five years, data compiled by Bloomberg show.

With Mondelez just six months removed from its split with Kraft, a sale to PepsiCo may not happen for at least a few months, Villere said. Bernstein estimates the companies may go forward with a deal sometime in the next 12 to 24 months.

Stifel’s Christopher Growe sees PepsiCo merging its global food assets with Mondelez and shedding the North American beverage business and possibly also the international beverage operations to create a company focused only on food.

Growth Potential

“We believe PepsiCo would be keen to offload in some form the North American beverage assets, if not creating a full global beverage company,” Growe, a St. Louis-based analyst at Stifel, wrote in a March 22 note to clients. The remaining snacks business “would be unmatched,” and “the growth potential of the combined company particularly in emerging markets could be quite intriguing.”

Growe estimates about $2 billion in cost savings from a deal, while the Bernstein analysts projected about $3 billion. Both said that buying Mondelez could increase PepsiCo’s earnings per share.

Mondelez’s market value at $56 billion is almost half of PepsiCo’s $128 billion, enough to potentially hinder a deal, Thomas Mullarkey, an analyst at Chicago-based Morningstar Inc., wrote in an April 22 report.

“Such a deal would be truly transformational and quite costly, and strikes us as unlikely at this point,” he wrote.

Less Inclined

PepsiCo shares surged April 18 after first-quarter profit topped analysts’ estimates, data compiled by Bloomberg show. Chief Executive Officer Indra Nooyi has increased marketing on key snack brands and also put a renewed focus on soft drinks to revive lagging beverage sales and regain market share from Coca- Cola Co. (KO)

Given its progress and rising stock price, Nooyi may be less inclined to pursue a takeover of Mondelez or break itself up, Janney’s Feeney said.

“Why make a 180-degree turn after having that success?” Feeney said. “If they were going to do some transformative acquisition or disposition, the point of maximum pressure and leverage was a year, year and a half ago.”

Still, a push from activist investors could trigger changes, said Todd Lowenstein, a Los Angeles-based money manager at HighMark Capital Management Inc., which oversees $18 billion including shares of Mondelez and PepsiCo.

“Shareholders would like them to keep all strategic options on the table, especially if an attractive asset comes around at an interesting price,” Lowenstein said in a phone interview. “The crown jewel for PepsiCo is the salty snacks business, and the same is true for Mondelez. These are scarce assets.”

Value Gap

Gamco estimates Mondelez is worth $37 a share to an acquirer based on 2014 financial projections, 17 percent more than yesterday’s closing price. By the firm’s math, PepsiCo is also undervalued, trading at a 12 discount to its so-called private-market value of $94 a share.

Villere said Mondelez (MDLZ) could be sold for 14 times his estimate for earnings before interest, taxes, depreciation and amortization, which implies a price in the “upper $30s.” An offer for at least $35 a share would value Mondelez at $77 billion, including net debt, according to data compiled by Bloomberg. That would be the largest takeover on record in the food and beverage industry, topping InBev NV’s $61 billion acquisition of Anheuser-Busch Cos. in 2008, the data show.

“Both companies are undervalued,” HighMark’s Lowenstein said. “Both are trying to ramp up their exposure and gain distribution muscle and scale in emerging markets. There is pretty sound strategic rationale behind a deal and you could structure it pretty accretively. They’d be remiss not considering it.”

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net

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