- With PepsiCo getting a new CEO this week, the industry is speculating that the global beverage and snack company may be aiming for a major business overhaul. However, CFO Hugh Johnston told Yahoo Finance that isn't likely to follow Indra Nooyi's transition of power to Ramon Laguarta.
- Many Wall Street players believe the company could improve its bottom line by selling off Quaker Foods North America, where operating profit in the most recent quarter dropped 1.5%, or by refranchising PepsiCo's bottling operations as Coca-Coca has recently done.
- It's also possible that sticking with the status quo would be a better idea for the company as it changes its top leadership. Yahoo Finance noted PepsiCo's third-quarter earnings and net sales beat Wall Street expectations, in part because of an uptick in the company's North American Beverages segment.
Some on Wall Street have been pushing to get PepsiCo to divest or split off portions of its business, such as its snacks segment or Quaker division. But former CEO Indra Nooyi successfully resisted efforts by activist investor Nelson Peltz to split the snacks and beverage businesses, Yahoo Finance reported.
Since Nooyi took over as CEO, the company's net revenue jumped from $35 billion in 2006 to $63.5 billion last year, resulting in a 162% shareholder return. PepsiCo recently reported third-quarter earnings that exceeded Wall Street expectations, thanks to a revival of the North American beverage segment. If the next chief can keep up these profits, then following her lead might make sense. But with a brand-new CEO in charge, the question is whether he will be more amenable to making big moves to shake up the company.
Some say now is the time for PepsiCo to sell Quaker. Michael Henage, a longtime investor, wrote for Seeking Alpha that the unit contributes less than 4% of the company's overall revenue and only 5% of its operating profit, so selling it wouldn't have a big impact on PepsiCo. He further suggests General Mills and Kellogg are two potential buyers for Quaker, and that PepsiCo should be able to fetch about $3.4 billion in a sale to help the company pay down its $16.7 billion in long-term debt.
Another move Laguarta could make is to divest PepsiCo's capital-intensive bottling operations to help free up needed cash flow. Henage called the $7.8-billion purchase back in 2009 "arguably one of the worst acquisitions the company has ever made." In April, Nooyi said PepsiCo was considering repositioning its bottling operations into a separate unit by making it a stand-alone public entity or putting it under multiple franchises, so it could be a move the new CEO makes.
Laguarta has already signaled that he wants to increase PepsiCo's revenue from between 2% and 3% to 5% annually, but merely trimming operational costs might not do the trick. The best moves he can make to meet these new revenue goals and keep investors happy might be to sell off Quaker and refranchise the bottling business.
PepsiCo's portfolio is more diverse after Nooyi's stint as CEO. She emphasized M&A, beverage innovations and healthier snack products to move away from a focus on sugary soft drinks. At the same time, the company has put more marketing investment behind its Gatorade, Pepsi and Mountain Dew products in order to further drive organic growth in those core brands.
Nooyi has been highly complimentary of her successor, calling him "a terrific executive with a long and proven track record of growing businesses." It's likely Laguarta will take some time before making any big changes to a global operation facing continuing competition and slowing demand for cereals and sugary beverages — and that needs to do something about its long-term debt.
Laguarta, who is from Spain, was previously in charge of the company's European business and has worked for PepsiCo for 22 years, so he undoubtedly knows what needs to be done and that a big ship can't change direction in a hurry. He will also have Nooyi to consult with since she plans to stay on as chairman until sometime early next year. Speculation about PepsiCo's next move will continue to increase as the company gets a new chief executive this week, but for now, it seems that no big changes are set in stone.