While speculation has swirled for a while now that activist investor Norman Peltz was interested in a merger between PepsiCo, Inc. (NYSE:PEP) and Mondelez International Inc (NASDAQ:MDLZ), fresh fuel was thrown on the fire after the beverage maker revealed that it has indeed been in discussions with Peltz’s Trian Fund Management in recent weeks “to discuss and consider their ideas.” The news comes after Peltz also disclosed that he continues to amass holdings in both companies and the likelihood of a merger between the two them grows.
Cut the cheese
Peltz has a history of shaking up management, and I pointed out last month he forced the hand of Cadbury into splitting its drinks and candy business in two and then agitating for the old Kraft company to acquire it. It was then Peltz who pushed for the divestiture of Mondelez International Inc (NASDAQ:MDLZ) from the current Kraft Foods Group Inc (NASDAQ:KRFT).
I noted last month that there were three possible outcomes for what Pepsi might do: acquire Mondelez International Inc (NASDAQ:MDLZ), spin off off its Frito-Lay snack-foods business, or do a merger-spinoff similar to what transpired with Cadbury and Kraft Foods Group Inc (NASDAQ:KRFT).
Opportunity bubbling up
If it happens, my money is on the first path. Last week, during Pepsi’s first-quarter conference call, Chairman and CEO Indra Nooyi said mature, low-growth businesses need to reinvent their industry, and while she was talking primarily about PepsiCo, Inc. (NYSE:PEP)’s drink business, she pointed out how a company needs both cash cows (beverages) and growth vehicles (snacks) and believed Pepsi had the right combination to generate profits for investors.
Yet analysts who think it may be more complicated than that point to The Coca-Cola Company (NYSE:KO) and its successful, nearly single-minded focus on beverages. A spinoff of Frito-Lay (or a merger with Mondelez International Inc (NASDAQ:MDLZ) before spinning off snacks) would give it a better chance of catching its arch-nemesis.
Snack on this
However, beverages are that sort of mature, low-growth business Nooyi described, and PepsiCo, Inc. (NYSE:PEP) needs to have the spark that snack foods provide to finance the growth options it’s considering. Coke also needs to improve its profitability, which is why it’s opting to go to a franchising model with its bottlers — something Pepsi already did.
Pepsi has a lever of growth it can pull in its snack division, and adding Mondelez International Inc (NASDAQ:MDLZ) to the portfolio — and not dumping it back on the market — will separate itself from the competition while allowing it to pay for the reinvention its CEO says is vitally needed.
The article Is Mondelez a Company Worth Snacking On? originally appeared on Fool.com is written by Rich Duprey.
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo and owns shares of PepsiCo.
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