The proposal cuts at the foundation of PepsiCo's business strategy, which revolves around the perceived synergies between its liquid offerings and its foodstuffs. Not surprisingly, the company has been swift to reject Peltz's idea in the strongest possible terms. But before we toss it out with the recycling, let's take a look to see if the proposal could be beneficial, or if it's really just so much flat soda.
On its website, PepsiCo's lineup of products appears under the category "Brands You Love." Indeed, you'd be hard-pressed to fine someone who isn't a fan of at least one -- Pepsi, Tropicana, Lipton, Quaker Oats, Doritos, Fritos, Lay's and Ruffles, among many others.
Synergy Among a Portfolio of Lovable Brands
But Peltz argues the familiarity and renown of those products has not translated into meaningful returns lately. In a letter Trian sent PepsiCo, it said that under the reign of current CEO Indra Nooyi, the firm's growth in earnings per share "has significantly trailed that of peers." Trian argues that separating the two businesses would eliminate the overhead that comes from a sprawling corporate structure, and make each of the resultant companies leaner and more "entrepreneurial."
A glance at recent history seems to indicate otherwise. Look at the arc of a recent snack food divorcee, Mondelez International (MDLZ). The company, which divested itself of what is now Kraft Foods Group (KRFT) in October 2012, saw fourth-quarter 2013 revenues of just under $9.5 billion. This was slightly lower than the result in the same quarter last year, its first as a stand-alone entity.
Attributable net ballooned more than threefold over that period, to $1.77 billion -- but much of this was due to a legal settlement the company reached with Starbucks (SBUX) over the sale of bagged coffee. Aside from that, the company's per-share attributable profit was $0.09, quite a bit lower than Q4 2012's $0.33.
Perhaps a better example is pure-play beverage producer Dr Pepper Snapple (DPS), the "Snapple" of which once fell under the umbrella of Triarc, a company run by Peltz. In fiscal 2013, Dr Pepper Snapple Group brought in just under $6 billion in revenue, while posting a bottom line of $624 million. Those represent improvements of 8 percent and 12 percent, respectively, over 2009, the company's first full year in its current corporate form.
Those are respectable numbers, but PepsiCo has them beat. Last year, the firm's top line was $66 billion, while its net came in at $6.7 billion. These represent sturdy gains of 54 percent and 13 percent, respectively, over the 2009 figures. Although at least some of this growth came from acquisitions, it demonstrates that over time the firm is more dynamic than some of its more narrowly focused and "entrepreneurial" rivals.
A Receptive Audience
Peltz says that his firm's proposal has struck a chord with many investors. After Trian first floated the separation proposal last July (as one of two options, the other being a merger with Mondelez), PepsiCo stock rose a few dollars to $87 per share, a fact Trian has trumpeted in its literature. That, however, was at the tail end of an earlier bullish run on the stock that saw it advance from just under $70 at the beginning of January to the low $80s three months later.
However, it must be asked whether those stockholders are more irritated by the company's not-bad fundamental performance or its recent stock price, which at the moment is down by nearly $10 from that July 2013 peak.
Current PepsiCo management is dead-set against a split of the company, but if Peltz and his gang are determined and can muster enough support, they might be able to get their way. As recent history indicates, though, that might not ultimately be in their best interests as shareholders.
Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends and owns shares of both PepsiCo and Starbucks. Try any of our newsletter services free for 30 days.