Monde-Lays

Nelson Peltz ends Pepsi's game of kick the can

Nelson Peltz just put an end to PepsiCo's game of kick the can. The uppity investor went public on Wednesday with a $60 billion-plus plan to crunch together Pepsi's salty nibbles with the sweet treats of Mondelez International or, alternatively, to carve up the $130 billion cola and chips maker. Both ideas are Activism 101. Peltz, however, makes a sensible enough case that it puts the onus on Chief Executive Indra Nooyi to make a strong defence.

The pressure has been building at Pepsi as surely as it does in a shaken bottle of Mountain Dew. Analysts have been arguing the merits of a breakup for a while. Earlier this year, Peltz disclosed his stakes in both companies, which led to speculation he might try to push these together, like when he urged Kraft's takeover of Cadbury. Pepsi meekly dismissed the idea and plodded ahead with its 'Power of One', campaign showcasing the synergies of soda and chips.

While the health merits of combining Doritos and Oreos might be indefensible, the financial logic is compelling. Peltz first takes aim at Pepsi's lagging shareholder returns under Nooyi against rivals, including Coca-Cola and Hershey, and its comparatively low investment in advertising as a percentage of sales. Buying Mondelez and then spinning off Pepsi's beverages, he argues, would be the best way to turn things around.

Even ignoring Peltz's case for $3 billion in revenue synergies, if eight per cent of the target's sales could be hacked out in the form of cost savings, it would amount to some $3 billion a year. Citigroup analysts in March saw great value in a Pepsi-Mondelez deal, assuming no synergies at all. Peltz also imagines an all-share transaction with a 16 per cent premium, giving shareholders of both companies the ability to share in any upside.

Other less ambitious ideas would forget Mondelez and simply spin out all or parts of the drinks arm. These would be weaker options to Peltz's mind but still create at least twice as much value for Pepsi investors as sitting still. Though the analysis might resemble a Wall Street pitch book, the Trian Fund Management boss also brings with him a calling card of success in upending the food industry - from Wendy's to Heinz to Kraft.

Pepsi has said it will provide a review of its North American beverages business next year. At this stage, it'll have to serve heartier fare.