Some PepsiCo investors cautious of Elliott’s plan to spin out bottling

By Jessica DiNapoli and Svea Herbst-Bayliss

NEW YORK (Reuters) -Some investors in PepsiCo support suggestions by activist shareholder Elliott Investment Management that the global food and beverage company cut costs and ditch sleepy brands like Quaker, but sound more cautious about the hedge fund’s boldest idea – to hive off the soda maker’s bottling network.

Elliott has said the move, which mirrors actions taken by Coca-Cola nearly a decade ago, would increase PepsiCo’s margins, allow the $200 billion company to focus on new chips and sodas and turn it into a simpler, more-focused organization.

Earlier this month, Elliott unveiled a $4 billion stake in PepsiCo – one of its largest investments- and released a 75-page report with ideas on how to boost profit at the company, whose share price has tumbled nearly 20% in the last year, underperforming a 2% fall in the broader S&P consumer staples index.

The maker of Mountain Dew, Gatorade, Lay’s, Doritos, Cheetos and many other brands should start looking at spinning off its bottling business in the coming months, according to Elliott’s presentation. But in the near term it must first improve its beverages business which has lost ground to rivals like Keurig Dr Pepper’s Dr. Pepper, the hedge fund said in a letter to the company’s board on September 2.

However, three long-term investors said that separating bottling is costly and could take years, further weighing on PepsiCo’s margins and earnings over that time.

“It seems unlikely that the current management team has the readiness to refranchise,” said Kai Lehmann, portfolio manager at Flossbach von Storch, one of PepsiCo’s top 30 shareholders, who agreed the move looks attractive at first sight but said it would hurt margins for some time.

Elliott and PepsiCo are having ongoing conversations about Elliott’s proposal, said a source close to the matter who was not authorized to publicly speak about it.

PepsiCo said it maintains an active dialogue with shareholders and that it will review Elliott’s presentation.

Elliott said in its presentation that operating margins in PepsiCo’s North American beverage business trail Coca-Cola’s by as much as 10 percentage points, which the company could recoup if it refranchised.

PepsiCo’s operating margins were 14% last year, up from 13.1% in 2023. Coke reported operating margins of 21.2% and 24.7% for the same time periods.

New York-based PepsiCo, whose namesake cola is the second-largest soda brand globally, has struggled to revive sales in the United States as consumers push back on price hikes and smaller sizes of its products.

Its shares rose more than 6% when Elliott revealed its position on September 2 but have since lost all gains and are down more than 10% since then.

Elliott declined to comment.

STATUS QUO NOT ACCEPTABLE

PepsiCo, led by CEO Ramon Laguarta since 2018, has been trying to better integrate its chips and sodas divisions, which now operate as almost separate companies, to cut costs.

The consumer giant has also acquired low-calorie soda Poppi and Mexican-American food maker Siete in an effort to appeal to consumers adopting healthier lifestyles.

While Elliott has not put a deadline on exactly when and how it wants PepsiCo to overhaul itself, its involvement signals that the hedge fund is unhappy with the status quo and frustrated by a perceived lack of urgency from its management and the board.

So far, Elliott has not criticized Pepsi’s management team or board publicly, but investors said they recall from other campaigns that the hedge fund can quickly ratchet up the pressure if its push for changes is flatly ignored.

Investors and analysts viewed more favorably Elliott’s suggestion that Pepsi lose some of its smaller brands.

Selling oatmeal label Quaker, acquired in 2001 with sports drink Gatorade for $13.4 billion in stock, would likely fetch around $6 billion, Lehmann said.

That money – and savings the company finds by abandoning poorly performing products – could help compensate for the fall in margins stemming from the process of divesting bottling, the investors and analysts said.

Two PepsiCo franchisees who declined to be named said they think the company should separate its company-owned bottlers because local businesses provide better service to nearby retailers.

PepsiCo frequently moves around executives before they can build relationships with customers, one of the franchisees said.

PepsiCo acquired its largest bottlers more than 15 years ago in an approximately $7.8 billion deal which it said at the time would help it speed up decision-making and lead to annual savings.

When Coca-Cola refranchised its network of bottlers in 2017, an effort that took more than five years, its sales and profit temporarily dropped as it offloaded revenue-generating businesses, although margins eventually improved.

“It’s a cost the company has to bear without immediate return on invested capital,” said Dave Wagner, portfolio manager at PepsiCo shareholder Aptus Capital Advisors.

(Reporting by Jessica DiNapoli and Svea Herbst-Bayliss in New York; Editing by Matthew Lewis)