Is Pepsi better off without Pepsi?

Pepsi is bringing Pepsi down.
Pepsi is bringing Pepsi down.
Image: AP Photo/Toby Talbot
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Did Pepsi CEO Indra Nooyi throw activist investors a bone today? During the call to discuss the company’s latest earnings, Nooyi said Pepsi is exploring “sensible opportunities to unlock incremental value through meaningful structural alternatives.” “Unlocking value” and “structural alternatives” are sometimes the jargon words used when considering a breakup.

Whether Pepsi, which makes an array of soft drinks, energy drinks, and snacks, goes that far remains to be seen. Nooyi said she won’t discuss the plans until next year. But she did note that the cola category, which includes Pepsi’s namesake products, has been tough as people drift away from sugary drinks for health reasons. That has brought down the performance of its North American beverage business.

Activist investor Ralph Whitworth of Relational Investors is among (paywall) the shareholders who have been pushing Pepsi to do something about its slow-growing beverage unit. One suggestion is separating that drinks business into an independent company. Investors are continuing to press for this, according to sources.

The slowing drinks business is seen as a drag on Pepsi’s growing snacks business. Today’s reported earnings beat analysts’ estimates because sales went up of products like Lays potato chips, Doritos, and Stacy’s pita chips. That gives investors even more ammunition to push for a breakup. Whitworth has discussed a separation of the North American beverage business with Nooyi in the past.

Pepsi had so far resisted the calls to split its units. In a counter-move, Nooyi further integrated the drinks and snacks businesses. They share operating costs, and splitting them now would increase those expenses. But the continuing underperformance of the North American drinks division means Nooyi has to make changes that improve the bottom line.

In the end, Pepsi may follow in the path of Kraft Foods, which didn’t look like an obvious breakup candidate, partly because of the operating overlap between its businesses. But in 2011, Kraft separated its slower growing North American grocery arm from its burgeoning snacks business.  The Kraft breakup was pushed by activist investors Nelson Peltz and Bill Ackman.

The unit that sells Kraft snacks like Oreo cookies took on the name Mondelez International after the split. And now Peltz has invested in both Mondelez and Pepsi, possibly so he can push for a merger between the two snack giants. Some have argued that such a merger would work better if Pepsi split snacks off from drinks—another reason why investors might push for a Pepsi breakup.