Elliott Makes $4 Billion Bet on PepsiCo’s Turnaround: Sees 50% Upside

TradingKey - Elliott Investment Management, one of the world’s largest activist funds, revealed on Tuesday that it has acquired $4 billion worth of shares in PepsiCo. The fund plans to push the beverage giant towards a strategic overhaul to reverse its lagging performance.

According to FactSet data, this investment positions Elliott among the top five active investors in the consumer giant, excluding index funds. The firm has penned a letter to PepsiCo’s board, outlining a detailed reform proposal that, if implemented, could boost the company's stock price by at least 50%.

In its communication, Elliott acknowledged PepsiCo’s past performance as lackluster. However, it argued that this presents a historic opportunity to rejuvenate a leading global enterprise and unlock substantial shareholder value.

This aligns with Elliott's typical investment strategy, known for urging reforms in companies it sees as having potential but underperforming. The activist fund has previously invested in companies like Honeywell, Starbucks, Southwest Airlines, and BHP. Its track record includes facilitating Honeywell’s split into three independent public companies, the appointment of a new CEO at Starbucks, and BHP's exit from the petroleum business.

Elliott Proposes Two Key Reforms

One of Elliott’s main suggestions is that PepsiCo should emulate rival Coca-Cola by refranchising its bottling network. This involves transferring ownership back to independent local bottlers to reduce operational complexity and allow each business to focus on its core competencies, thereby accelerating performance growth and improving financial results.

The franchising model has been Coca-Cola’s key to market success in recent years. Under this framework, Coca-Cola focuses on product development and brand building, while franchised bottlers handle production and sales. This allows Coca-Cola to maintain product quality control without the need to build extensive manufacturing plants and sales channels, effectively reducing costs.

Jim Osman, founder of The Edge Group, noted that Coca-Cola’s profitability soared following its major bottling restructuring in 2017.

Additionally, Elliott urged PepsiCo to streamline its extensive product portfolio by divesting non-core and underperforming assets, particularly in its food business, and to offer investors a more concrete plan for performance improvement.

These proposals come as PepsiCo's core products face challenges and its growth engines start to falter. Currently, PepsiCo’s flagship product, Pepsi-Cola, has dropped to the 4th position in U.S. sales. Historically, the food business served as a growth engine, accounting for about 60% of total revenue, but this too has started to waver. North American food business sales have been slowing each quarter since peaking at the end of 2022.

Some of PepsiCo’s beverage distributors believe the company has sacrificed its core beverage business by focusing its investments on the food division, leading to what they describe as "a bleak period for the brand." Some industry insiders even speculate that the beverage business, which will constitute around 40% of 2024 revenue, might perform better as a standalone entity.

PepsiCo’s Response to Activist Pressure

In response to Elliott’s demands for reforms, PepsiCo stated that it will evaluate Elliott's perspectives and remains confident in its current strategy aimed at driving sustainable growth.

Even before Elliott’s involvement, PepsiCo had already started taking action. Since assuming his role in 2018, CEO Ramon Laguarta has implemented measures such as closing two North American food business plants to cut costs and integrating logistics to enhance efficiency.

PepsiCo’s Q2 earnings report, released in July, exceeded expectations due to robust international market growth offsetting North American weakness. The company anticipates a rebound in North American demand as its strategic adjustments take hold.

Following the announcement of Elliott’s investment, PepsiCo shares briefly surged over 5% in pre-market trading on Tuesday, before paring gains to close up 1.1% at $150.28.