Mondelez International Inc (MDLZ), The Hershey Company (HSY): Chocolate Is a Delicious Business for Investors

A merger of PepsiCo, Inc. (NYSE:PEP) and Mondelez could create a global snack leader with as much as $6 billion in cost and revenue synergies. After a merger, the combined company would be valued at 8.6 times its 2013 EBITDA, including $3.7 billion in cost synergies.

After merging, Peltz also suggested spinning off the beverage business. Grouping the snack business and the beverage business together has not delivered PepsiCo’s shareholders full potential value because those two businesses are “fundamentally different,” he said. While the snack business is quite profitable, generating 18% EBIT margin, the beverage business’ EBIT margin is much lower at only 12%.

Moreover, PepsiCo’s beverage business requires a lot of capital expenditure, especially after consolidating bottling operations. Peltz believes that PepsiCo would maximize shareholders’ value by separating those businesses into two pure-play companies. PepsiCo is trading at $85.30 per share, with a total market cap of $131.9 billion. The market values PepsiCo at around 13 times its trailing EBITDA.

My Foolish take

With the leading global position in chocolate, consistent positive free cash flow, a reasonable amount of leverage and increasing dividend payments, Hershey is really a long-term pick for patient income investors. Investors might also consider PepsiCo as an opportunistic play on the possible separation of the beverage and snack business and/or the merger with Mondelez.

Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends PepsiCo. The Motley Fool owns shares of PepsiCo.

The article Chocolate Is a Delicious Business for Investors originally appeared on Fool.com and is written by Anh HOANG.

Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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