Putting Fizz Into Pepsico: Weighing Up Activist Advice For Us Giant

Credit: Jonathan Weiss / Shutterstock.com

“We dream this position is received successful nan tone successful which it is shared,” Elliott Investment Management partners Jesse Cohn and Marc Steinberg wrote successful a missive to PepsiCo’s committee astatine nan commencement of nan period mounting retired really nan activistic investor believes nan US elephantine tin improve.

That spirit, they added, was 1 of “a desire to activity together to thief PepsiCo build connected its bequest of occurrence and execute its afloat potential”.

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They continued: “We person heavy respect for nan institution and its leaders and, while we support nan steps PepsiCo has precocious announced, we and our chap shareholders judge that location is an opportunity for overmuch more. Our extremity is to collaborate pinch nan committee and guidance to return PepsiCo to its rightful spot arsenic a market-leading user packaged equipment powerhouse pinch superior results and impact.”

It was, astatine look value, a constructive opening salvo. “Fortunately for PepsiCo, its problems are wrong its powerfulness to address. Its halfway marque portfolio remains among nan astir charismatic successful nan CPG manufacture and its structural moats are arsenic powerful arsenic ever,” Cohn and Steinberg said.

“Elliott’s goals astatine PepsiCo are straightforward: thief nan institution sharpen focus, thrust innovation, go much businesslike and unlock nan worth that its starring brands, unmatched standard and world-class labor deserve. The way backmost to winning is clear and achievable.”

However, fixed Elliott Investment Management’s grounds astatine sparking alteration elsewhere, PepsiCo’s elder activity would beryllium forgiven if they were a small concerned astatine what mightiness dishonesty ahead.

A floor plan of nan investor and laminitis Paul Singer by The New Yorker successful 2018 said: “Elliott’s executives opportunity that astir of their finance campaigns proceed without important conflict but a noticeable number look to extremity up mired successful drama. From nan outside, it tin look arsenic if Elliott is causing nan play but nan patient argues that it simply identifies pre-existing problems and acts arsenic a cheque connected nan system.”

The companies astatine which Elliott Investment Management has pushed for alteration see BP (which said it would standard backmost finance successful renewable power and up spending connected lipid and state successful nan aftermath of nan investor joining its stock roster), US manufacturing and tech group Honeywell (which subsequently group retired plans to divided into three) and Starbucks (which changed CEO; though nan activistic had not communicated a patient desire for a alteration astatine nan apical but called nan move “a transformational step”).

What does Elliott Investment Management want to see?

Elliott Investment Management says it manages costs that together clasp an finance of $4 billion in PepsiCo. The investor calls nan Pepsi Max and Lay’s proprietor “one of nan world’s awesome user franchises” but it wants to spot important change.

The activistic wants PepsiCo to reappraisal nan make-up of its nutrient and drinks businesses successful North America to boost its capacity aft a play of “poor financial results”.

PepsiCo, Cohn and Steinberg argued successful their missive and position sent to nan company’s board, is astatine “a captious inflection point”.

Describing PepsiCo arsenic “a melodramatic under-performer”, they said nan institution should go “a much focused, streamlined” business.

Cohn and Steinberg said nan group’s PepsiCo Beverages North America (PBNA) section – which accounted for 30% of gross successful 2024 – had “underperformed its peers for much than a decade connected some maturation and margins.

They’ve called connected nan Gatorade proprietor to measurement up nan imaginable refranchising of its drinks bottling web successful North America and reappraisal its beverage portfolio successful nan region to make that broadside of nan business little complex.

Meanwhile, Cohn and Steinberg judge nan capacity of PepsiCo Foods North America (PFNA) has “more than offset” results from nan drinks limb successful nan region but added: “More recently, however, PFNA has begun to falter. Growth has slowed owed to a challenging user backdrop and bid of PepsiCo-specific issues, while important increases successful finance spending good beyond nan needs of nan existent request situation person meaningfully compressed profit margins.”

They urged PepsiCo to amended “align” PFNA’s costs to nan “present measurement reality” and streamline nan division’s portfolio by offloading “non-core and underperforming assets”. The partners said PFNA could beryllium supported by much finance successful “proven brands”, improving nan “value perception” and pursuing M&A.

Crucially, Elliot Investment Management’s disapproval is centred connected PepsiCo’s North American operations. The company’s world business is, Cohn and Steinberg, said “rapidly expanding pinch a important semipermanent maturation runway”.

So far, PepsiCo’s nationalist statements connected nan activist’s finance and proposal person been brief. “PepsiCo maintains an progressive and productive speech pinch our shareholders and values constructive input connected delivering semipermanent shareholder value. We statement Elliott Investment Management’s disclosure of its position and will reappraisal its perspectives wrong nan discourse of our strategy to thrust sustainable growth,” nan institution said.

In 2024, PepsiCo booked nett gross of $91.85bn, up 0.4% connected a twelvemonth earlier. Operating profit grew 7.5% to $12.89bn. Net income accrued 5.3% to $9.58bn.

Chairman and CEO Ramon Laguarta, who has spent 3 decades astatine PepsiCo, was appointed to nan apical occupation successful 2018. Given Laguarta succeeded Indra Nooyi aft her 12-year stint astatine nan helm, his promotion sparked speculation astatine nan clip that location could beryllium important alteration astatine nan company, including, manufacture watchers mused, an exit from cereal aliases moreover a divided of nan company.

There person been notable firm moves, including nan sale of a mostly stake successful juice brands including Tropicana and Naked successful 2021 and 2 $1bn-plus acquisitions successful nan past 12 months: Mexican-American snacks shaper Siete Foods and US prebiotic soda marque Poppi.

Credit: Siete Foods / Facebook

However, truthful acold this year, PepsiCo’s stock value has fallen by much than 5%. Over nan aforesaid clip period, Coca-Cola’s shares are up almost 8%.

In July, PepsiCo reported a 0.3% diminution successful first-half nett revenue, though it saw a 1.7% emergence organically. Operating profit dropped 35.4% to $4.37bn. Adjusted for one-off items, “core”, constant-currency, operating profit fell 5.1% to $6.7bn. Net income slid 39.6% to $3.01bn.

Notably, alongside nan results, PepsiCo said it would look to boost its productivity and “improve its costs structure” by “integrating” its businesses successful North America.

In PepsiCo’s consequence to Elliot Investment Management’s missive and presentation, nan Quaker cereals proprietor outlined its ain strategy. “That strategy includes targeted investments successful innovation, portfolio transformation, and world maturation arsenic good arsenic corporate-wide, multiyear productivity initiatives,” nan institution said. “We are assured that nan successful execution of these initiatives positions PepsiCo to accelerate growth, fortify our competitory advantage, and present meaningful, semipermanent worth for our shareholders.”

It’s “good news” for PepsiCo

But are these actions enough? Should PepsiCo perceive to Elliot Investment Management? It’s understandable if nan quality of an activistic shareholder connected a company’s roster sparks interest but specified investors tin play an important domiciled successful pointing retired weaknesses successful organisation aliases strategy and truthful successful exerting immoderate unit to amended performance.

“I deliberation Elliott’s reappraisal of PepsiCo is very accurate,” Stefano Di Napoli, nan laminitis and CEO astatine UK-based CPGS Consulting, tells Just Food. “The banal is still trading astatine historically inexpensive 2009-level valuations, truthful this feels for illustration a buy-the-dip moment. The underperformer is intelligibly nan North American business, while LatAm and EMEA are already delivering nan mid–single-digit maturation Elliott is targeting for PepsiCo overall. I really spot nan $4bn liking arsenic bully news. PepsiCo has what it takes to present nan 50% uplift Elliott is expecting.”

According to Di Napoli, PepsiCo has clear strengths: scale, “iconic brands” and nan company’s finance successful nan away-from-home market, which, he adds, “could beryllium a awesome competitory advantage. No-one other is investing arsenic heavy successful this channel”.

Nonetheless, he concurs pinch Elliott Investment Management’s stance that PepsiCo needs to tidy up its portfolio. “The study calls retired portfolio optimisation, and I work together – it’s captious to free up resources and stake powerfully connected nan brands that tin really win,” Di Napoli says. “Coca-Cola successful 2018 and much precocious Unilever pinch nan attraction connected nan 30 ‘power brands’ person already taken this path: trim underperforming brands and double down connected nan core. PepsiCo hasn’t. There’s a deficiency of clear prioritisation.”

The Quaker question

Quaker’s position successful nan PepsiCo portfolio has agelong been a talking point. Might nan porridge marque spell nan aforesaid measurement arsenic its chap meal staple Tropicana? “Without Tropicana, we judge Quaker is apt of little strategical liking pinch less commercialized synergies,” Elliott Investment Management said successful its presentation.

The 2001 woody for Quaker brought pinch it a clutch of different brands still successful nan aforesaid PepsiCo unchangeable successful rice, pasta, syrups and meal cereal. Growth from nan Quaker broadside of PFNA has been slower than nan snacks business.

The activistic investor added: “There are few, if any, synergies betwixt nan Quaker foods portfolio and Frito-Lay. It’s clip to attraction connected PFNA’s halfway strengths successful salty snacking.”

Credit: monticello/Shutterstock.com

It’s not conscionable from nutrient that Elliott Investment Management believes location should beryllium disposals. The investor praised nan recent move to waste nan marque authorities to energy-drink Rockstar successful nan US and Canada to Celsius Holdings arsenic “a measurement successful nan correct direction”, adding: “There are much opportunities to simplify nan portfolio.”

But nan money argues PepsiCo doesn’t needfully person to find buyers for immoderate drinks assets: nan company, nan investor says, should simply do distant pinch immoderate products, pointing to nan affirmative effect connected Coca-Cola’s margins erstwhile PepsiCo’s awesome rival trim its portfolio successful 2018.

And Elliott Investment Management’s different notable proposal is for PepsiCo to refranchise its bottling business successful North America. “From nan clip PepsiCo refranchised its bottlers successful 1999 until it repurchased them successful 2010, nan PepsiCo strategy importantly outperformed nan Coca-Cola system,” nan investor said successful its presentation. Between nan precocious 2000s and 2017, Coca-Cola went nan different way: returning nan ownership of its bottling operations successful North America to its bottlers and, nan investor argued, saw nan benefits. “The Coca-Cola system’s refranchising is simply a well-known lawsuit study successful nan powerfulness of attraction and improved execution,” Elliott Investment Management said.

Di Napoli underlines captious to immoderate specified move would beryllium to get nan caller organisation moving fluently. “PepsiCo already uses this strategy successful Europe, astir notably pinch Carlsberg Britvic successful nan UK, truthful I don’t deliberation building unsocial is nan answer,” he says. “The bigger situation is operational: really nan exemplary useful day-to-day. Coke needed years to make nan strategy activity smoothly. For PepsiCo, nan attraction has to beryllium connected nan operating model, ways of working, and execution – not conscionable structure. The advantage is they already person knowledgeable group pinch nan bottling strategy successful Europe who tin thief guideline nan North American transition.”

Should PepsiCo divided successful two?

A break-up of nan institution was a taxable that raised its caput a fewer times successful nan 2010s, possibly astir notably successful 2014 erstwhile Nelson Peltz’s Trian Fund Management said it was “encouraging” PepsiCo to spell down that path.

Kellogg Co.’s divided into 2 and Kraft Heinz’s determination to do nan aforesaid has, inevitably, raised speculation PepsiCo mightiness break up.

The idea, though, has mostly gone disconnected nan schedule and it wasn’t mentioned successful Elliott Investment Management’s presentation.

The existent situation is not whether PepsiCo should break up, but whether it tin execute amended pinch nan standard it already has

“I really work together pinch Elliott not mentioning separation successful nan report,” Di Napoli says. “PepsiCo’s world standard and nan operation of nutrient and beverages are existent strengths.

“You could reason a divided mightiness unlock immoderate short-term worth if investors put higher multiples connected a pure-play snacks aliases beverage business but I deliberation nan existent discount is much astir caller capacity than astir structure. There are large synergies betwixt snacks and beverages and splitting them would mean losing that. The existent situation is not whether PepsiCo should break up, but whether it tin execute amended pinch nan standard it already has.”

Investor “scepticism”

TD Cowen expert Robert Moskow believes Elliott Investment Management “may spur affirmative change” astatine PepsiCo. “In our experience, presentations for illustration these summation nan consciousness of urgency for guidance teams to boost their banal by demonstrating guardant advancement connected initiatives aliases introducing caller ones. This would travel arsenic a alleviation for investors, immoderate of whom position PepsiCo guidance arsenic overly complacent,” Moskow says. “Regarding nan circumstantial recommendations, we judge PepsiCo guidance concurs pinch Elliott connected nan request to push down Frito-Lay’s costs but we don’t cognize really they consciousness astir nan rest.”

The US finance slope has canvassed investor sentiment successful nan aftermath of nan activistic going public. “In our calls pinch 17 investors, we heard a precocious grade of scepticism astir Elliott Investment Management’s proposals to PepsiCo to create value,” Moskow says. “Most viewed nan overture arsenic excessively ‘friendly’ to spur change, aliases excessively improbable to materialise – i.e. re-franchising nan bottlers – aliases already successful process i.e. boost Frito’s margins. We are incrementally much positive, albeit cognisant of nan challenges.”