NEW YORK — Acquiring a business the size of Mondel?z International is “too risky” at this point, Hugh Johnston, chief financial officer of PepsiCo, Inc., said in a July 24 interview that aired on Fox Business.
Mr. Johnston’s comments came in response to a question about how the Purchase, N.Y.-based company is handling calls from investor Nelson Peltz to either break up the company to create two pure play beverage and snack food companies or merge with Mondel?z International to create a global snack food company and spinning off the beverage business.
But Mr. Johnston dismissed Mr. Peltz’s concerns, saying PepsiCo feels the portfolio is in “a terrific spot.”
“What you see happening is beverages is reinforcing snacks and snacks is reinforcing beverages,” he said. “We really do feel like the portfolio is working terrifically well, and that combined with the productivity initiatives … is creating a lot of value for shareholders, and you saw that in Q2 results.”
Those second-quarter results included a 35% increase in income. For the quarter ended June 15, PepsiCo had income of $2,010 million, equal to $1.28 per share on the common stock, which compared with $1,488 million, or 94c per share, during the same quarter of the previous year. Revenue for the quarter was $16,807 million, up 2% from $16,458 million during the same quarter of the previous year.
Within its PepsiCo Americas Beverages unit, operating profit during the second quarter increased 5% to $882 million from $840 million, even as sales fell 2% to $5,260 million from $5,352 million. Meanwhile, operating profit at PepsiCo Americas Foods rose 8% to $1,357 million from $1,260 million, while sales increased 5% to $6,025 million from $5,724 million.
In a July 24 conference call with financial analysts to discuss second-quarter results, Indra Nooyi, chairman and chief executive officer, was less direct in discussing any changes at the food and beverage giant, saying only that PepsiCo is “exploring every possible alternative, including structural alternatives, to further improve our margins and returns to this business.”
In his interview with Fox Business, though, Mr. Johnston was candid.
“We feel like this portfolio is working so well right now, and the idea of taking on an $80 billion acquisition, and going through all the risk of integration, and paying a premium for that business — I believe it would probably create value for Mondel?z shareholders, but I really think it’s too risky for PepsiCo shareholders,” he said.
He added, “We think we have the portfolio right. We’re not interested in doing large deals. We think that by focusing on our portfolio that’s the way to create best value for shareholders.”
The speculation surrounding Mr. Peltz’s push for a change at PepsiCo coupled with the release of financials has piqued the interest of the investment community, too. Bonnie Herzog, senior analyst at Wells Fargo Securities, wrote in a July 24 research note that she believes “the clock is ticking for management to turn the beverages business around and prove the integrated model does more than simply subsidize ongoing weakness in (North America) beverages.”
“Earlier this year, PepsiCo announced its Hybrid Everyday Value pricing architecture to address inconsistent pricing within beverages and long-term negative implications of a strategy supported by heavy promotions,” Ms. Herzog wrote. “While we generally are in favor of this strategy, which likely contributed to the 3% net pricing growth in PepsiCo Americas Beverages, we remain concerned about the long-term volume declines. Based on our ‘Beverage Buzz’ survey, we believe Coca-Cola has been more promotional recently in an effort to drive volume share gains.
“While PepsiCo has been able to offset volume declines with pricing, this strategy may fall apart if Coca-Cola maintains its heavy promotions, which we suspect could accelerate if PepsiCo volume declines and lead to the acceleration of negative top-line growth.”
Ms. Herzog maintained a “market perform” rating on PepsiCo, indicating the stock appears appropriately valued and its total return is likely to be in line with the market over the next 12 months.