How Mondelez CEO Can Fend Off a Second Billionaire in Two Years

Irene Rosenfeld
Mondelez CEO Irene Rosenfeld. Photographer: Chris Ratcliffe/Bloomberg

Irene Rosenfeld, chief executive officer of Mondelez International Inc., is suddenly facing down a second billionaire activist investor in just over two years.

Rosenfeld is under pressure to shake up the snack-food giant after Bill Ackman’s firm disclosed a $5.6 billion stake on Wednesday. Ackman, who runs the hedge fund Pershing Square Capital Management, has a history of pushing for changes at the companies he targets. A transformative deal -- possibly where Mondelez gets acquired -- may be the ultimate prize.

Rosenfeld successfully beat back another challenge from an activist investor in 2014, when Nelson Peltz abandoned a campaign to get Mondelez to merge with PepsiCo Inc. Mondelez forged a truce with Peltz’s firm, Trian Fund Management, by adding the billionaire to its board and pushing ahead with a plan to slash expenses.

This time around, Rosenfeld may have a tougher time defusing the situation. After a string of food deals by 3G Capital and Warren Buffett’s Berkshire Hathaway Inc. -- followed by massive cost cuts -- investors now have a blueprint for how to squeeze money out of companies.

In response to Ackman’s move, Mondelez said it would stay focused on its current game plan. The maker of Oreos and Wheat Thins is pursuing $3 billion in cutbacks and shifting production overseas.

“We welcome Pershing Square as investors in our company,” Mondelez said in a statement. “We’ll continue to focus on executing our strategy and on delivering value for all our shareholders.”

If Rosenfeld wants to keep Mondelez independent, she may need to make a persuasive case to investors that the company is heading in the right direction. Here are the points that could make the difference:

CUTTING DEEPER

Rosenfeld has already been working to lower costs and improve margins since Mondelez split from Kraft Foods in 2012. She’s also invested in foreign projects designed to streamline the supply chain, part of the total effort to eliminate $3 billion in annual expenses. Just last month, it announced plans to shift some production from Chicago to Mexico, leading to 600 job cuts.

But there’s pressure to do more. The merger of Kraft Foods and H.J. Heinz -- a deal orchestrated by 3G and Buffett -- has put the U.S. food industry on notice. 3G is known for ruthlessly cutting costs, and it’s now applying that discipline to the combined company. That means less spending on travel, electricity and office supplies. 3G even eliminated Kraft’s perk of offering free refrigerated snacks at its headquarters, according to people familiar with the matter.

Alexia Howard, an analyst at Sanford C. Bernstein & Co., expects Mondelez to increase its margin targets sometime soon, which may help address criticism.

BRING IN ACKMAN

Rosenfeld turned Peltz from a foe to an ally in January 2014 when Mondelez added him to its board. He had been pushing for the company to merge with PepsiCo, who owns Frito-Lay, in a bid to create a new snack conglomerate. Peltz had also argued for changing Mondelez’s name, which he said sounded like a disease.

As a board member, he hasn’t advocated for as many dramatic changes. Instead, Peltz has pushed for cutbacks and higher profit margins, especially after growth slowed in emerging markets. Mondelez could reach a similar agreement with Ackman’s firm, said Brian Yarbrough, an analyst at Edward Jones. But that could mean contending with at least two directors lobbying for deeper cuts.

Despite a reputation as a antagonistic shareholder, Ackman has made peace with companies before. He came to an agreement in 2013 with Air Products & Chemicals Inc. In that case, the CEO stepped down and three independent directors were added to the board. Ackman also negotiated for board changes at Zoetis Inc.

MAKING THE CASE

Mondelez generates about 80 percent of its revenue outside North America. When the company split from Kraft, which is mostly focused on the U.S., the idea was to attack faster-growing markets overseas. Part of the logic behind the breakup was that Mondelez would be more nimble without Kraft’s mature North American operations. Rosenfeld served as CEO of the old Kraft and oversaw the move. Since then, Mondelez has been hit by dual problems: a strong dollar, and slowing growth in markets like China and Latin America.

Still, the middle class is expanding in those countries, meaning the long-term prospects for Mondelez are strong. The question is whether or not Ackman plans to be patient, Yarbrough said.

“You have a massive amount of people moving into the middle class and buying more cookies and crackers and candy,” he said. “Longer term, the demographics are still extremely favorable.”

FEW BUYERS

Rosenfeld’s best argument for keeping Mondelez independent may be that there are few logical bidders. The company has a market value north of $75 billion, making it difficult to digest for most potential acquirers. If Ackman’s plan is to coax 3G into making a play for Mondelez, he may need to be patient.

The Kraft-Heinz merger became official just last month, and 3G is working to cut $1.5 billion in costs from the combined company. History suggests that 3G will integrate the businesses and pay down debt before looking for another target. That may take about two years, Yarbrough said.

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