BlackRock support for PepsiCo may stymie Peltz call for Mondelez merger

NEW YORK Thu Jul 18, 2013 7:33pm EDT

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NEW YORK (Reuters) - BlackRock Inc (BLK.N) said on Thursday it opposes Nelson Peltz's proposal that PepsiCo Inc (PEP.N) buy Mondelez International (MDLZ.O) and shed its beverage business, signaling that the activist investor's proposal could fall flat with fellow investors.

"At the moment, I would disagree with him," Larry Fink, chief executive of BlackRock, the world's largest money manager, said in an interview on CNBC. "I question how it would add long-term value."

Peltz, a PepsiCo shareholder, said on Wednesday he wants PepsiCo to buy the maker of Oreo cookies and Cadbury chocolate for at least $62 billion and spin off PepsiCo's beverage business - either globally or just in the Americas or North America.

PepsiCo has said repeatedly that it sees no need for large deals or splitting off its global drinks business, which includes its name-sake soft drink, Tropicana juice and Gatorade.

Fink said BlackRock currently owns 5 percent of PepsiCo.

Peltz's Trian Fund Management has a stake of about $1.3 billion, or less than 1 percent, in PepsiCo, which boasts a market capitalization of more than $131 billion.

With such a small stake, Peltz would have to persuade large institutional shareholders to help him bring PepsiCo to the negotiating table, said Henry Smith, chief investment officer at Haverford Quality Investing, which owns just under 1 million PepsiCo shares.

"I don't think I'd bet against him," Smith said.

Trian declined to comment.

Peltz, who was involved in the breakups of Cadbury Schweppes and Kraft Foods, said his cause may be helped by the fact that 37 of the top 40 PepsiCo shareholders also own Mondelez.

It may be easier to woo Mondelez shareholders, said Sandy Villere III, a portfolio manager at Villere & Co, which owns Mondelez shares.

"You can have your cake and eat it too," he said, referring to the growth prospects of Mondelez on its own and any future upside from a deal.

PepsiCo may be forced to move toward one of Peltz's options if he can generate institutional support, said Smith.

"But that's not going to happen in the next few months. That's a multiple-quarter time frame," Smith said.

PepsiCo shares closed up 1.8 percent at $86.80 on Thursday on the New York Stock Exchange. They have gained 21 percent during the past year, as the company has made progress streamlining its business and improving its performance.

Mondelez shares closed up 0.3 percent at $30.58, still well below the $35 to $38 per share price Peltz indicated for an acquisition - a sign that Barclays analyst Andrew Lazar took to mean investors remain skeptical that a deal will be consummated.

"Not that many people on the buy side really believe that there's a ton here. Many on the sell side would love to be involved in such a transaction, but not that many believe it's going to happen," said James Tierney, chief investment officer at WP Stewart, which used to own PepsiCo shares.

Adding PepsiCo's Frito-Lay snacks to the large international network Mondelez uses to sell Cadbury chocolates and Oreo cookies is part of the rationale for the deal, along with cost savings and the greater focus that would come from being just a snack company, following separation of the drinks business.

But J.P. Morgan analyst John Faucher said the market may not have enough faith in PepsiCo management to pull off such a big deal at this point.

Last year was a transition year during which PepsiCo cut thousands of jobs, pruned its portfolio and increased its marketing to reignite growth amid investor frustration at a stagnant stock price and a North American drink business that was losing ground to Coca-Cola Co (KO.N). PepsiCo's business has improved, but analysts say the company still has more to do.

"With neither company operating at full speed at this point, we think adding in massive integration would only exacerbate their problems," Faucher said, adding that he is skeptical of any deal that involves combining store delivery networks, since disruptions can hurt sales.

Of the strategic options laid out in Peltz's analysis, the one that seems the most likely to occur is the spin-off of the North American beverage business, because the company is already considering options for it.

PepsiCo has said repeatedly that it would update the market on that business in early 2014. Coca-Cola has already begun to refranchise some of its U.S. bottler system and analysts have long said they expect similar moves from PepsiCo.

(Editing by Steve Orlofsky)

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