$80bn Mondelez snacks splurge ‘too risky’ for PepsiCo – CFO

Speaking to Fox Business by phone as PepsiCo announced solid Q2 and H1 2013 results yesterday, Johnston dismissed billionaire activist/investor Nelson Peltz’s calls for the company to spin-off its whole beverage business and buy Mondelez to consolidate its strength in snacks.

“We feel like this portfolio is working so well right now, and the idea of taking on an $80bn acquisition, and going through all the risk of integration, and paying a premium for that business – I believe it would probably create value for Mondelez shareholders, but I really think it’s too risky for PepsiCo shareholders,”​ Johnston said.

“We think we have the portfolio right, we’re not interested in doing large deals, we think that by focusing on our shareholders that’s the way to create best value for shareholders,”​ he added.

Seconding Johnston’s point on yesterday’s earnings call, PepsiCo CEO Indra Nooyi insisted PepsiCo’s strategy only involved potential “tuck-in acquisitions”​ of $500m or less in any year, but discussing the troubled North Americas Beverages (PAB) business hinted cryptically at “structural alternatives” ​to improve returns.

Clock ticking for Pepsi management?​

Whether this could mean a PAB spin-off or not, PepsiCo as a whole reported overall 2% net revenue growth to $16.81bn in Q2 as the firm beat analyst estimates to deliver earnings per share (EPS) of $1.28.

Beverage volumes rose 1.5% worldwide on an organic basis but fell 3.5% in North America; organic revenue there fell 1% but core constant currency operating profit rose 4% due to higher pricing and productivity gains.

However, analyst Bonnie Herzog from Wells Fargo Securities said in a note yesterday that she believed “the clock is ticking for management to turn the beverages business around and prove the integrated model does more than simply subsidize ongoing weakness in NA beverages”.​

Glossing strong growth in emerging markets Nooyi cited 7% organic revenue growth in Mexico, 15% in Latin America and 12% in Turkey, while in Russia Pepsi, Lipton, 7UP and Russky Dar Kvass grew double digits.

Outstripping Coke in China…​

Whereas Coke suffered from flat quarterly volumes in China, market leader PepsiCo is benefitting from its tie-up with Tingyi with organic revenue up 22% in beverages and 23% in snacks, and CSD growth of 10% “significantly outpacing the category”.​

Turning to perennial problem child PAB, Nooyi told analysts her firm was investing in breakthrough innovation and new technologies with potential to “reframe the beverage category by removing some of the compromises that consumers face with regard to calories and ingredients” ​and boost margins.

“As we’ve said in the past, we’re also exploring every possible alternative, including structural alternatives, to further improve our margins and returns in this business,”​ she added, promising an update in early 2014.

One strategy to build value in beverages is PepsiCo’s much discussed Hybrid Everyday Value​ pricing structure, which helped the firm to +3% net pricing growth in North America and offset quarterly volume declines.

But Herzog warned: “This strategy may fall apart if KO [Coca-Cola] maintains its heavy promotions, which we suspect could accelerate PEP [PepsiCo] volume declines.”​