{ "docId": "019dd923-622b-71dc-a6db-4a755dd43689", "docSlug": "8b17eeb54806", "documentTitle": "PepsiCo (PEP)", "authorId": "06_Trian_Partners", "authorName": "Nelson Peltz", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "activist_investor", "sourceTypeLabel": "Activist investor", "presentationDate": "2014-02-19 00:00:00", "orientation": "portrait", "aspectRatio": 0.77272725, "pageNumber": 21, "pageCount": 41, "prevPage": 20, "nextPage": 22, "slideType": "expose_contradiction", "function": "expose_contradiction", "density": "overcrowded", "nDataPoints": 1, "notes": "This is a text-heavy research note page. It uses a series of arguments to dismantle management's 'Power of One' synergy claims.", "elementsJson": [ "paragraph" ], "metadataConfidence": 0.95, "imagePath": null, "slideHref": "/slides/019dd923-622b-71dc-a6db-4a755dd43689/21", "deckHref": "/decks/019dd923-622b-71dc-a6db-4a755dd43689", "deckJsonHref": "/decks/019dd923-622b-71dc-a6db-4a755dd43689.json", "deckAnchorHref": "/decks/019dd923-622b-71dc-a6db-4a755dd43689#slide-21", "components": [ { "bbox": null, "kind": "callout", "text": "If PepsiCo is so willing to give up the potential for synergies in two of the biggest and fastest growing countries in the world, we are hard pressed to believe that operating synergies elsewhere in the world are material.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-1ac2-71b6-bf4e-f241f9413bd5", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.09, "w": 0.78, "x": 0.11, "y": 0.49 }, "kind": "paragraph", "text": "Regardless of whether these transactions were the right strategic moves, selling to bottlers in China and Mexico means that PepsiCo will derive minimal operating synergies between snacks and beverages in these markets going forward. If PepsiCo is so willing to give up the potential for synergies in two of the biggest and fastest growing countries in the world, we are hard pressed to believe that operating synergies elsewhere in the world are material.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "407b7069-964a-4e5e-bf37-6dbfbd7c0ff0", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.03, "w": 0.78, "x": 0.11, "y": 0.08 }, "kind": "paragraph", "text": "the majority of its snacks and beverages portfolios in its self-defined “key strategic markets.” See Appendix H for details.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "5b134fdf-452e-4244-9c58-550b11710bb7", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.23, "w": 0.78, "x": 0.11, "y": 0.59 }, "kind": "paragraph", "text": "Snacks and beverages each generate strong free cash flow on their own to support emerging markets investment. Another management argument as to why snacks and beverages cannot be separated is that the company needs the strong cash flow generated in the U.S. and other developed markets to support emerging markets growth. However, we believe it is clear that standalone snacks and beverage companies, each with $30bn+ in sales and leading brands, would generate significant free cash flow on their own to fund growth investments. Moreover, we do not believe the availability of capital is the gating item with respect to growth in many of these markets. Frito-Lay has been unsuccessful in materially penetrating countries like China because consumer tastes differ. Being successful in these markets requires new approaches and ideas, not simply more dollars to invest. We believe focused management teams dedicated to growing their businesses are more likely to find breakthrough ideas.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "72d1ab3a-f685-4ee0-a07d-6237d735e31b", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.21, "w": 0.78, "x": 0.11, "y": 0.27 }, "kind": "paragraph", "text": "China and Mexico bottling deals limit scope of “Power of One” synergies. In 2011, PepsiCo announced agreements to contribute its Chinese and Mexican bottling operations to partners in exchange for small equity interests. These transactions had several near-term benefits, as PepsiCo was reportedly losing $180mm annually in China and the business was going to require significant plant capital expenditures. We suspect the company may not have hit short-term EPS targets had management retained these businesses. But Trian is on record stating PepsiCo may have mortgaged its future by relinquishing control of its brands in these two key strategic markets. Mexico is the largest beverage market in the world in terms of per capita CSD consumption. China is projected to become the world’s largest beverage market in total sales by 2015.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "7322b764-6d90-4b6d-bf7f-c0adb1229109", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.11, "w": 0.78, "x": 0.11, "y": 0.83 }, "kind": "paragraph", "text": "The “global beverage war” ended long ago. The “global war” to win #1 share was settled long ago in almost every major beverage market. Coca-Cola has the stronger position across most of the globe while PepsiCo has areas of regional strength. That is not to say that Coke and Pepsi don’t fight for share on a daily basis but simply that leadership positions have generally been determined. The few areas of the world where the top market share position is still being", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "a7ac4ac7-a808-4c1f-a5c5-7275142f6c30", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.13, "w": 0.78, "x": 0.11, "y": 0.12 }, "kind": "paragraph", "text": "There is little evidence that “Power of One” drives improved performance around the world. A recent analysis by a third-party research firm concluded that across PepsiCo’s top markets, higher market shares in one business unit (snacks or beverages) has not translated into better organic growth for the other. Said another way, there does not appear to be statistical data supporting the claim that in countries where either beverages or snacks has a market leading presence, the other category is more likely to gain market share over time. See Appendix I for details.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "d334f466-c014-43df-91c8-3d2f7ceee363", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.02, "w": 0.03, "x": 0.85, "y": 0.93 }, "kind": "source-note", "text": "17", "attrs": null, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "5701e0d2-a3b7-47e6-99b1-8a835e1cc3e2", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "arcBeats": [], "loops": [ { "to": 27, "from": 11, "name": "Logic Chain", "slug": "01-logic-chain", "bestFor": "Skeptical audiences, controversial recommendations, rigorous analysis", "matchId": "4d567b7d-0bb0-40c7-bec4-4acbbd035cfb", "evidence": "The document presents a clear and logical sequence of arguments.", "position": 0, "objective": "To present a logical chain of arguments for separating snacks and beverages businesses.", "structure": "Premise 1 (Accepted truth) -> Premise 2 (Observed fact) -> Therefore... (Inevitable conclusion)", "confidence": 0.8, "description": "Build an airtight chain of logic where each premise leads inevitably to the conclusion" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }