UPDATE 3-Trian's Peltz says PepsiCo should buy Mondelez

Wed Jul 17, 2013 9:33pm EDT

By Martinne Geller

NEW YORK, July 17 (Reuters) - Activist shareholder Nelson Peltz dialed up pressure on PepsiCo Inc, saying it should buy Mondelez International Inc for more than $62 billion and spin off its soft drink business.

Peltz, a force behind some of the global food industry's biggest deals, finally laid out his vision for what would be a snack food powerhouse on Wednesday, three months after reporting ownership stakes in each company that sparked rampant Wall Street speculation.

PepsiCo is at a "strategic crossroads," Trian said, adding that the status quo was "unsustainable."

The revelation came after the expiration of a timeframe during which Peltz and PepsiCo Chief Executive Indra Nooyi had agreed to privately weigh the options his Trian Fund Management had suggested, sources familiar with the matter told Reuters.

Trian posted a 59-page analysis on its website explaining why PepsiCo should buy Mondelez in an all-stock deal at $35 per share, a 16 percent premium to its earlier price, and then give shareholders a dividend worth 20 percent of the combined market capitalization. Including debt, the deal's enterprise value would approach $78 billion. (Analysis:)

Peltz also appeared at a conference on Wednesday that was broadcast on CNBC television where he said the deal could get done in a range of $35 to $38 per share.

Trian also wants PepsiCo to concurrently spin off its beverage business. It laid out various scenarios for that, including spinning off the global business, the Americas business and the North American business.

PepsiCo has said repeatedly that it sees no need for large-scale mergers.

"This idea is a non-starter," said a person familiar with PepsiCo's thinking, adding that the deal would be good for Mondelez shareholders, but for PepsiCo shareholders it would be an "extremely risky" purchase of a company that has "been underperforming, with huge exposure to slow-growth Western European markets."

As for spinning off the global beverage business, the source, who declined to be named because the talks between Peltz and PepsiCo are private, said it "just isn't going to happen."

PepsiCo has already said publicly that it was weighing structural options for its North American beverage business but does not plan to discuss it until early next year. On Wednesday a PepsiCo spokesman said the company was confident in its ability to deliver long-term shareholder value as an integrated food and beverage company.

Peltz also said he is meeting with Mondelez Chief Executive Irene Rosenfeld in the next couple weeks.

Mondelez "regularly engages in meaningful conversations with its shareholders and looks forward to meeting with Trian to learn about their perspectives in more detail," according to a spokesman.

ANOTHER BREAK-UP

Peltz, a billionaire from Brooklyn who has done deals for decades, said a company cannot be compelled to do a transformational merger. This deal's benefits would include cost-savings and increased sales opportunities from selling PepsiCo's Frito-Lay snacks through the same international distribution network Mondelez uses to sell its Cadbury chocolates and Oreo cookies.

If PepsiCo will not buy Mondelez, it must separate its higher-growth snacks business from its slower-growing, cash-generating drinks business, Trian said.

As for Mondelez, Peltz praised Rosenfeld for her strategic vision, but said the company "has some work to do" in the way of fattening its profit margins.

"The crown jewel, obviously is Frito-Lay as well as the international business," said Kevin Dreyer, a portfolio manager of the Gabelli Asset Fund. He said the merger would boost profits quickly while the spin-off would "unshackle" those growth businesses from the weaker North American drinks unit.

Such a divorce would be reminiscent of the breakup of Cadbury Schweppes into Dr Pepper Snapple Group and Cadbury, which Peltz had a role in. He was also involved in the subsequent purchase of Cadbury by Kraft and that company's breakup into Kraft Foods Group Inc and Mondelez.

Gabelli's parent company, Gamco Investors, owns 6.3 million shares of Mondelez and 1.6 million shares of PepsiCo.

"We hope they pay attention to Mr. Peltz's comments because we think there are a lot of ways shareholders can win," Dreyer said.

PepsiCo shares closed up 1.5 percent at $85.24 on the New York Stock Exchange, while Mondelez shares rose 2.1 percent to $30.50 on the Nasdaq.

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