Citi: Pepsi-Mondelez Merger Would Be Salty-Sweet

Bloomberg

If Kraft spinoff Mondelez merged with Pepsi, the result would be the world’s largest snack enterprise with incredible scale in emerging markets.

As the larger of the two, PepsiCo (PEP) would be the likely buyer of Mondelez International�(MDLZ), says�Citigroup�Analyst David Driscoll. Pepsi could see a 4% boost in earnings per share in the first year, assuming it would pay a 20% premium and could borrow up to 4 times ebitda (earnings before interest, taxes, depreciation and amortization.)

Shares of Pepsi are down 1% to $77.83 headed into the close, while Mondelez stock is up 0.5% to $29.89.

Mondelez was only spun out of Kraft on Oct. 1, 2012. But think of the salty and sweet marriages: Pepsi brands Mountain Dew and Doritos meet Mondelez brands Oreo cookies and Cadbury chocolate. The speculation arises from reports Friday that activist investor Nelson Peltz�invested at least $2 billion in the companies (see our post here). The combo would have pro-forma 2013 earnings of $8.7 billion, or $4.53 per share, on sales of $103.8 billion, Citi calculates. Pepsi’s operating margins, at an estimated 15.1% for 2013 are higher than the 12.7% expected for Mondelez.

Pepsi would represent about 30% of the combined company. Emerging markets would be about 37% of combined revenue. One important potential glitch: “an enormous complexity in bringing these two businesses together given their different distribution models in some markets.”

Pepsi could sell its beverage business to help pay for Mondelez, though it might have trouble finding a buyer, Driscoll writes.

It might make sense for PEP to hold on to its beverage�business for some time to come. First, we think PEP is working hard to stabilize/grow�its beverage business in various markets, through more marketing, more innovation�and more distribution (e.g. in China with its Tingyi joint venture).

Deal or no deal, Peltz�s interest is positive for Mondelez and

“adds to the confidence that Mondelez will be under real pressure to perform. We think this will add to investor confidence and encourage Mondelez management to push very, very hard on improving Mondelez�s below average margin structure and to improve its execution in the emerging markets.”

Barron’s Andrew Bary said in this weekend’s print edition that a merger could add $9 to Pepsi shares, and makes sense though Pepsi says it isn’t interested. (See “Follow Up,” March 25, 2013, second item, and “How To Play the Kraft Spinoff,” Oct. 1, 2012, subscription required.) Barrons.com wrote favorably about Mondelez earlier this month. (See “Mondelez Has Ingredients For Success,” March 7, 2012, subscription required.)