Would PepsiCo Be Healthier If It Ditched the Snacks? One Activist Investor Says 'Yes'

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Nelson Peltz doesn't want to wash down his Fritos with a Pepsi -- at least, not if they're both sold by the same company. His investment firm, Trian Fund Management, is a major shareholder in PepsiCo (PEP), which owns both of those brands, and he's pushing for it to separate its beverage business from its snack foods.

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.

%VIRTUAL-article-sponsoredlinks%That said, some market players are warming to the idea. In a poll of institutional investors conducted by Bernstein Research and released earlier this week, 55 percent of the 100 respondents surveyed said they supported the breakup of the company -- and 63 of those polled were current PepsiCo shareholders.

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.

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Savings Adventure: In Search of Amazing Asian Sodas and Drinks
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Would PepsiCo Be Healthier If It Ditched the Snacks? One Activist Investor Says 'Yes'

When it comes to sweet, rich, bottled coffee, it's hard to beat Starbucks. Then again, at 200 calories and 3 grams of fat per bottle, Starbucks' Frappuccino is hardly a healthy drink. For 34 percent less, my local Asian market offered several other canned coffees, including Pokka and Sangaria. While not quite as tasty as the Frappuccino, Pokka has just over half the calories and one-sixth the fat. And, for those who are really serious about cutting back on the bad stuff, Ucc's unsweetened black coffee has all the caffeine but none of the calories or fat.
 

Photo: Cote, Flickr

Given that Red Bull is a copy of Krating Daeng, a Thai energy drink, it isn't a surprise that Asian markets often offer an impressive selection of caffeine-packed sodas. What is surprising, however, is how much better many of them taste -- and how much cheaper they are. In an office taste test, the staff of DailyFinance universally preferred the flavor of Roaring Lion, an energy drink that's almost exactly like Red Bull, but has a lighter, more citrusy flavor and costs 26 percent less. Yunker, a Japanese energy soda was even better: Packed with herbs, B vitamins and Coenzyme Q10, it had a mild, almost lychee-like taste -- for about the same price as Red Bull.

Photo: Roaring Lion Energy Drink / Facebook

In recent months, coconut juice has really come into its own. Little surprise: With twice the potassium and half the calories of a banana, a bottle of Zico is a healthier alternative to soda or fruit juice. Unfortunately, the flavor leaves something to be desired -- it tends to be a bit watery and slightly stale-tasting. On the bright side, Asian markets generally offer a wide array of other, more flavorful options. In an office taste test, most of DailyFinance's writers preferred the Taste Nirvana brand. Unlike Zico, it's not reconstituted, and its flavor was a lot fresher and more vibrant. And, as an added benefit, it's 16 percent cheaper than Zico.
From Arizona to Snapple, Lipton to HonesTea, convenience stores are packed with iced tea options. But the amazing array available in the local 7-Eleven pales beside the  choices in many Asian markets. Everybody's got green tea and chai, but where else will you find rose petal and bergamot flavored black tea or Jasmine flavored green tea? If you really want to expand your horizons (without spending a lot of money), Asian markets should be high on your list.
While it's great to get lower prices on some of your favorite drinks, the real joy of Asian markets lie in their incredible selection of weird stuff. You may not fall in love with basil seed drink or grass jelly drink or melon cream soda, but if you're looking for something a little different, they definitely fill the bill. And, at a dollar or two per bottle, these little adventures in other cultures are a real bargain.
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