This morning, The Telegraph in the UK reported that Nelson Peltz’s Trian Funds has taken a position in both MDLZ and PEP, with the hope of agitating a merger between the two companies. We would like to make a couple of quick points on the topic:
- The Telegraph is a legitimate source, so this strikes us as more than the normal spivvy hedge fund rumors that bubble up occasionally across the pond, meaning that the positions mentioned have a decent shot at being real
- We have to balance that with our innate distrust of Friday rumors toward the end of the quarter
- Mr. Peltz has owned PEP as a passive investor previously (November 2011) and the speculation back then was that he would agitate for a separation of the beverage and snack assets (his duration as a shareholder was very short, in that case)
- PEP separation speculation makes sense, and may be a matter of if not when, but it has been a matter of speculation for a long time (multi-year duration) but faces several hurdles, not the least significant of which is management reluctance
- PEP CEO Indra Nooyi, while a source of frustration for some shareholders, does have the benefit of a reasonable share price performance (+12% YTD) to help keep some potential wolves at bay
- MDLZ may be a passive position as well, though we should point out that the legacy Cadbury business is one that Mr. Peltz knows well, so the possibility of more active role in that company is the better possibility, in our view
- Mr. Peltz has an intimate knowledge of the beverage business, having bought and sold Snapple, then sold again (sort of) as an activist investor in Cadbury
- In this case, PEP takes on the role of the old KFT (business to be broken up) while MDLZ, well, is the old (and new) Cadbury business – circle of life
- MDLZ CEO Irene Rosenfeld has been a source of frustration as well for investors in recent quarters, but does deserve credit for the separation of the Kraft assets and the associated valuation creation there – we suspect she has a longer rope with MDLZ shareholders than Nooyi does with PEP shareholders to the extent that she has actually done something in recent years with respect to reshaping her company
- The second level of speculation that we have heard regarding PEP is that as part of the separation of snacking and beverage assets, Anheuser-Busch InBev would look to acquire the beverage business, though we are not sure ABI desires either the competitive positioning or the growth profile.
- Finally, to wrap all the speculation of the last couple of months into one note, we suspect investors may try to weave POST into this narrative as well, as break up of PEP may be into three parts – snacks, beverages and cereal, with cereal combining with the POST assets
- Finally, we think investors have to contextualize all these rumors within the current market valuation of staples post-HNZ, recognizing that being the second company to make an acquisition in a consolidation “wave” makes it much more difficult (or unlikely) to create value for shareholders
Bottom line, the speculation as outlined in the article makes sense to us, but intuitively compelling and likely are often two very different things and we would caution against basing a shorter-term investment thesis based on this type of speculation. Of the two companies speculated, we prefer MDLZ on a longer-term basis, but think that near-term earnings expectations may be too optimistic.
Also, the current multiples in the staples group makes us loathe to chase anything.
Here is the article:
http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9947125/Nelson-Peltz-plots-112bn-Cadbury-merger.html
-Rob
Robert Campagnino
Managing Director
HEDGEYE RISK MANAGEMENT, LLC
Matt Hedrick
Senior Analyst