Frustration Bubbles Over Pepsi’s United Snacks and Soda Divisions

Pepsi

PepsiCo (NYSE:PEP) executives and activist investor Nelson Peltz can’t seem to get along, and they disagree on one big thing: the currently intertwined divisions of the Purchase, New York-based company. As has been the case for a while now, Nelson’s Trian Fund Management is pushing for a breakup of Pepsi-Cola and its snack division, while CEO Indra Nooyi is staying strong in her conviction that the two should stay together.

Trian, which is believed to own close to $1.2 billion in Pepsi stock, has long pressured Pepsi executives to orchestrate a division, arguing that the snack and beverage giant should spin off its struggling beverage business so the lucrative snack division isn’t brought down with it. The activist investor has backed off in recent months on account of Pepsi executives’ promise that they are conducting an “exhaustive” strategic review, but according to the Wall Street Journal, now, Trian is back on its pressure game. The investor is not happy with Pepsi’s conclusions from the review, which include the company’s promise to boost dividends and stock buybacks by 35 percent this year, with no news on a split. The Journal reports that Trian recently sent a 37-page letter to Pepsi’s board of directors Wednesday, explaining why it continues to believe the company should spin off its struggling beverage business.

A best-case scenario for Trian would be Pepsi’s agreement to spin off its underperforming beverage business and buy Mondelez International (NASDAQ:MDLZ) to create a global snacks behemoth. Trian’s Peltz outlined those ambitions in the “white paper” he published in July, and Peltz even went on to secure a board seat at Mondelez, which has brands that include Oreo cookies and Trident gum. As of now, his requests have not been met, and Nooyi continues to maintain that Pepsi is strongest when both its beverage and snacks division are together, leaving Mondelez out of the party. According to the Wall Street Journal, she told analysts in a conference call last week that separating snacks and drinks “loses significant synergies.” She said “there wasn’t a stone” unturned during management’s “exhaustive” yearlong strategic review, which included consultants and bankers, and executives agreed that the two divisions should stay united, per the publication.

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But Trian is nothing if not persistent. Along with its 37-page letter, Trian says it is meeting with shareholders “immediately” to discuss Pepsi’s future, and it isn’t above conducting public shareholder forums in an attempt to draw more investor support for a breakup. Trian believes that Pepsi’s earnings will also speak for themselves, as the company reported last week that its beverage volume rose 1 percent in the fourth quarter while its snacks grew 3 percent; operating profit at its Americas beverage unit fell 10 percent. Pepsi’s rival, Coca-Cola Co. (NYSE:KO), also released disappointing fourth-quarter figures this week, and now both soda companies are suffering from a drop in North American soda volumes by a mid-single-digit percentage.

That’s why Trian believes Pepsi needs to split its businesses — so each division can be put “in the hands of empowered and focused management,” the Wall Street Journal reports the investor writing. Trian isn’t purposefully going after Nooyi and isn’t believed to be calling for her removal, but the CEO’s staunch opposition to the activist investor still hasn’t gone over well with Trian.

Trian sees great potential for Pepsi’s prosperous snacks division and doesn’t want its soda business to debilitate those results, while Nooyi believes the two segments’ unity is necessary for their success. What’s more, the investor believes Pepsi let its business division lose ground to rival Coke when it missed out on several key innovations, and the complaints just keep on coming. There’s obvious discord out in Purchase, New York, but questions still remain: Can investors and executives eventually see eye to eye, and whose opinion will win out?

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