Trian Tries Again to Split Up PepsiCo

Peltz renews crusade to separate beverage, snack businesses

NEW YORK -- "Activist investor" and Trian Fund Management LP founder Nelson Peltz is again urging PepsiCo Inc. to separate its global snack and beverage businesses into two independent public companies. He sent a letter to PepsiCo's board and published a 31-page white paper detailing why such a split is the right long-term decision for the business and would create substantial value for shareholders.

Nelson Peltz Trian

In January, Peltz joined the board of candy and snacks company Mondelez International Inc., Deerfield, Ill., itself recently split off from Kraft Foods Inc. He had been pushing for PepsiCo to buy Mondelez and create a global snack foods giant after spinning off beverages.

Peltz put his crusade on hold while PepsiCo conducted a strategic review of the business. Last week, the Purchase, N.Y.-based company announced that it would not split.

Pepsi released this statement: "The company previously announced its intent to provide an update to its shareholders and other interested parties on its assessment of structural alternatives for its North American Beverage business (NAB). After an exhaustive review, which included the assistance of bankers and consultants, the company's management and board of directors have concluded that PepsiCo will maximize shareholder value by retaining NAB in its current structure within the PepsiCo portfolio.

"The decision was based largely on a detailed assessment of the following considerations.

"The business competes in a large, profitable category that is one of the most important to the company's retail customers; provides operational and customer scale benefits to PepsiCo's other operations in North America, and brand and innovation scale to its international beverage business; is competitively well-positioned in the attractive non-carbonated and flavored carbonated segments of the category; is expected to benefit from planned productivity and innovation initiatives; and generates substantial U.S. free cash flow which is critical to provide cash returns to shareholders."

Chairman and CEO Indra Nooyi said, "We have a well-balanced geographic profile, a complementary portfolio of food and beverage products grounded in taste and convenience that are leaders in their respective categories, and iconic brands that are loved by consumers the world over. The breadth and diversity of our portfolio provides our investors with an attractive combination of sustainable growth and strong cash flow generation capability."

She added, "Our financial targets for 2014 are consistent with our long-term goals. As a reflection of our positive outlook for the business and our expectation for consistent, strong cash flow generation, we intend to increase our cash returns to shareholders in 2014 to $8.7 billion [a 35% increase] through both higher dividends and share repurchases."

Peltz disagreed "with the outcome of PepsiCo's strategic review, particularly following another quarter of uninspiring performance and weak 2014 guidance."

His letter and white paper analyze the "challenges inherent in PepsiCo's current structure and outline what Trian believes to be the best path forward for the company to generate sustainable increases in long-term shareholder value. Trian is concerned by PepsiCo's continuing underperformance since 2006 which Trian believes is due primarily to PepsiCo's misguided reliance on the 'Power of One' strategy."

He also said, "Trian believes standalone snacks and beverage companies, positioned correctly in the market, would unlock value at PepsiCo. A separation would create two leaner and more entrepreneurial companies--a standalone snacks business would offer investors strong growth in sales, margins and free cash flow generation, and a standalone beverage business would provide strong, stable free cash flow that may be optimized through an effective balance sheet and capital return program. Separating snacks and beverages would eliminate PepsiCo's current holding company structure, remove layers of unproductive overhead, drive cost savings to reinvest in the brands, and foster operating and cultural benefits. Trian believes a standalone beverage business will generate strong, stable free cash flow today and higher cash flow in the future under focused leadership."

In response to the letter and white paper, PepsiCo released this response: "PepsiCo's management and board of directors have spoken clearly on this issue and are fully aligned with our strategy outlined last week. We engaged constructively with Trian and invested a large amount of management time and significant financial resources analyzing Trian's proposals. Management and the Board have spoken clearly, and our focus is on delivering results for our shareholders, not new, costly distractions that will harm shareholder interests. We are confident in our ability to deliver long-term shareholder value as an integrated food and beverage company."

Click here to read the full letter and white paper.

Founded in 2005 by Peltz, Peter May and Ed Garden, New York City-based Trian seeks to invest in "high-quality but undervalued and underperforming public companies and to work constructively with the management and boards of those companies to significantly enhance shareholder value for all shareholders through a combination of improved operational execution, strategic redirection, more efficient capital allocation and increased focus."

Purchase, N.Y.-based PepsiCo is a global food and beverage leader with net revenues of more than $65 billion and a product portfolio that includes 22 brands that generate more than $1 billion each in annual retail sales. Its main businesses are Quaker, Tropicana, Gatorade, Frito-Lay and Pepsi-Cola.

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