Billionaire Nelson Peltz Hopes for Soft Drink Alpha

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Billionaire Nelson Peltz appeared at CNBC's Delivering Alpha conference to further tout his idea of a PepsiCo (NYSE: PEP) and Mondelez International (NASDAQ: MDLZ) merger. Peltz is the founder of Trian Fund Management. This is not new news, Peltz has been hinting at a PepsiCo-Mondelez deal for several months now and even took noticeable stakes in both companies during the first quarter. 

Moderator, Andrew Ross Sorkin, notes that PepsiCo has performed better than the Kraft Foods and Mondelez spinoffs. But Peltz notes that while Mondelez's margins are low, it's the growth story that makes it attractive. 

Peltz believes that PepsiCo should buy Mondelez for $35, all-stock -- a 14% premium to today's price. Peltz thinks that Pepsi could reach $175 per share under his merger -- 100% upside. Peltz has a meeting with Mondelez management late this summer to discuss their potential options. 

The other interesting point that Peltz makes is that Pepsi could go at it alone. If the beverage company avoids getting entangled with Mondelez, it could separate its snacks and drinks business, making the two worth $145 combined, a 66% premium to the stock's current stock price. 

The potential spinoff of Pepsi's beverage business, would not be unlike the Kraft Foods break up that Peltz orchestrated last year. Kraft split itself into Kraft Foods Group, which runs the North American grocery business while Mondelez is the international piece. Other key "splits" that Peltz has been a part of includes Cadbury and Wendy's
Who needs who more? 
I  still believe that one of the key advantages of a PepsiCo-Mondelez merger, beyond synergies, will be revenue diversification. PepsiCo has its revenue weighted toward North America, while Mondelez is much more of an international operator. Last year, 70% of PepsiCo's sales were generated via its North American beverage and food segments. Mondelez gets about 80% of revenue from outside North America. 

Mondelez is the number one global seller of biscuits, chocolate, candy, and powdered beverages. The company also has the number two position in gum and coffee. The deal would make the combined company one of the world's leading food companies. 

However, worth noting is that PepsiCo is already the largest food and beverage company in North American and second in the world. 


Andrew Ross Sorkin also brought up the idea that Peltz might be amassing a large stake in DuPont (NYSE: DD). Peltz's reply was a reference to a conversation that he and Sorkin had prior to coming on stage. Sorkin had asked Peltz "if I say DuPont, what comes to mind?" His answer was "Paint." 

DuPont sold its auto and industrial paint business to The Carlyle Group back in February for $4.9 billion. Reading between the lines, if Peltz does have a DuPont position, could he be looking to further break it up? Just this week, DuPont announced that it could be looking to spinoff its performance chemicals segment. 

The company has a variety of operations and is the second largest U.S. chemicals manufacturer. Its agricultural segment accounts for nearly 30% of sales, the nutrition and health segment is at 10%, industrial bio-sciences is 3.4%, electronic and communication technologies is 7.7%, performance chemicals at 20.4%, performance materials 18% and safety/protection 10.9%.

The cold and wet weather conditions in major farming states has pressured the company's agriculture and nutrition segments. The big tailwind for DuPont is its agriculture segment. Back in 2012, the company launched 154 new corn hybrid products and 33 new soybean varieties in North America.

One of the key initiatives for the company includes the move toward developing biotech-based approaches for food production. The urbanization of emerging markets will drive the increase in demand for the global farm economy, driven by corn seed and protection products. 

Bottom line

Peltz closed out his time at Delivering Alpha by saying that he despises the Mondelez name. "Mondelez the name I hate, I think it costs us two multiples in terms of PE ratio. It sounds like a disease! I got Mondelez!" Even still, I think both PepsiCo and Mondelez are solid investments in their own right.

Although Peltz is hoping for a $35 Mondelez buyout, the stock traded as high as $32 earlier this year, meaning the buyout offer is only 9% above its all time high. I think the $35 buyout would be considered too low and could be raised. In a previous discussion, Peltz noted that PepsiCo is viewed as number two to Coca-Cola, yet two-thirds of its value is in its snack foods business. I agree with Peltz that sometimes Pepsi is misunderstood and too often compared with Coke, when in fact, they are very different. 
As for DuPont, the company is trading at 22 times earnings, which is nearly half of what major peer Dow Chemical trades around. Although Peltz didn't confirm that he was amassing a DuPont stake, he didn't deny it, and the company has announced it could be spinning off its paint pigment segment, which Peltz alluded too.

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Marshall Hargrave owns shares of Mondelez International. The Motley Fool recommends PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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