PURCHASE, N.Y. -- In response to a letter that "activist investor" and Trian Fund Management LP founder Nelson Peltz sent to PepsiCo Inc. in mid-February for the company to split off its beverages business from its snacks business, Ian Cook, presiding director of the board of PepsiCo, sent a letter to Trian on Feb. 27, 2014.
Peltz letter said that "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 rejecting Trian's suggestion, PepsiCo's latest letter expresses a position consistent with prior public statements.
Dear Mr. Peltz:
Your letter of Feb. 19, 2014, has been received and shared with the entire PepsiCo board and its management. I am writing to advise you that the board and management are comfortable and in complete alignment in rejecting your proposal.
The board has been closely involved in evaluating the arguments that you presented in your earlier white paper, many of which were repeated in your recent correspondence. After initially proposing a spinoff of the snacks business and a merger of it with Mondelez, you have now indicated that your primary suggestion at this point is for PepsiCo to separate its global snacks and beverage businesses.
We have carefully studied management's extensive analysis of the current company structure and its beverage business and management's conclusions that much of Trian's data is selective and, in many instances, misused. Our board and management team are confident in the thoroughness of this analysis and in the conclusion that PepsiCo's value is maximized as an integrated food and beverage company. We trust that you appreciate the seriousness with which we have examined your observations and proposal and the firmness with which we reject the proposal to separate the businesses.
In short, the board and management have concluded that the financial engineering you propose erodes value for shareholders rather than creates value.
We welcome our shareholders' suggestions for enhancing value; however, after fully considering and rejecting your proposals, the board and management have turned their attention to running the integrated company for the benefit of all shareholders and delivering the financial commitments projected.
We thank you for your interest in PepsiCo.
Sincerely, Ian Cook, Presiding Director
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.
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.