Snack War: Peltz vs. Rosenfeld

July 21, 2013, 4:46 p.m. ET

Snack War: Peltz vs. Rosenfeld

Mondelez CEO Is Familiar With Investor’s Efforts to Reshape Companies

JULIE JARGON

Irene Rosenfeld can’t seem to shake activist investor Nelson Peltz. First, Mr. Peltz’s Trian Fund Management LP pushed her in 2007 to sell underperforming brands such as Post cereals while she was chief executive of Kraft Foods Inc. Then in 2010, with Ms. Rosenfeld still as CEO, Kraft made a $19.4 billion acquisition of British chocolate maker Cadbury PLC, two years after Cadbury separated its drink and candy businesses at Trian’s urging. After the Cadbury deal, Mr. Peltz and his partners used their stake in Kraft to press the company to split in two. The separation of Kraft’s North American groceries unit and international snack business occurred last year, with the snack business renamed asMondelez International Inc. MDLZ +0.36% Now, Trian’s machinations are threatening to bedevil Ms. Rosenfeld yet again. Mr. Peltz last week proposed to merge PepsiCo Inc.’s PEP -0.45% snack business with Mondelez, where Ms. Rosenfeld became chairman and CEO under the changes at Kraft.

The proposed deal would create a gobal foods giant with $70 billion in combined revenue. While Mr. Peltz emphasized his plans for PepsiCo, in which Trian has built a stake of more than $1.3 billion as of last week, his action also could portend a new effort to shake up Mondelez even if a merger—which PepsiCo opposes—doesn’t pan out.

Trian also has built up a $1 billion stake in Mondelez, and in a paper outlining its argument for restructuring PepsiCo, Trian said that a tie-up with PepsiCo’s snack business would help boost Mondelez’s margins—jabbing at a sore spot for Mondelez shareholders.

Mr. Peltz, speaking at an investor conference televised on CNBC, also took a shot at the Mondelez name, which Ms. Rosenfeld’s management team chose last year. “It sounds like a disease,” he said.

Mr. Peltz plans to meet with Ms. Rosenfeld in the weeks to come, according to both him and Mondelez. She wasn’t available for comment.

Mondelez said its name has been “very well-received.” A person familiar with the matter said, “Irene has no issue listening to Nelson,” and that “her interactions with him are always professional.”

The person said Ms. Rosenfeld had been exploring a sale of Post, a purchase of Cadbury and a split of Kraft independent of Mr. Peltz’s proposals. Ms. Rosenfeld “constantly has people war-gaming ways to create shareholder value,” this person said.

Some Mondelez investors have gotten restive since the split from Kraft nine months ago. Kraft executives had said ahead of the split that Mondelez was supposed to be the faster-growing of the two new companies, with such big international brands as Oreo, Trident and Cadbury. The groceries company, which kept the Kraft name, is smaller in terms of revenue.

But Mondelez has suffered from missteps. Slow sales in its gum business in Brazil caused inventory to build up last fall. Its U.S. gum business also has been declining. Also last year, its Russia business was hurt when Mondelez didn’t lower its coffee prices as fast as some of its competitors.

Mondelez has rectified some of those issues, but in May, the company reported that organic sales growth, which strips out currency effects, acquisitions and divestitures, fell short of its target for the third-straight quarter since the spinoff. Mondelez shares have risen just 9.6% since they started trading Oct. 2, closing at $30.69 on Friday, while shares of its former sibling, Kraft Foods Group Inc., KRFT +0.84% have risen 27%.

Jeff Wilson, vice president at Montag & Caldwell LLC, which owned more than 16.4 million Mondelez shares at the end of March, said Mondelez’s profit margins have “significant” potential to grow “and we are hopeful that that opportunity can be realized sooner than what has been articulated by management.”

Mondelez, in a written statement, said that the split has created value for shareholders of the old Kraft, and that Mondelez is “well-positioned for strong future growth” and “committed to continuing to enhance value for all shareholders.”

Mondelez has been spending more on marketing, expanding distribution in emerging markets and streamlining production. Profit margins started to improve in the quarter ended March 31, although total net income fell 30% to $568 million from $813 million a year earlier, due largely to costs associated with the spinoff. Quarterly revenue rose 0.9% to $8.7 billion.

Both Mr. Peltz and Ms. Rosenfeld are known for their hard-charging styles. Ms. Rosenfeld, 60 years old, a former basketball player at Cornell University who still shoots hoops occasionally, rose up the ranks at various food companies—including Frito-Lay, which is now the PepsiCo snacks business. She became Kraft’s CEO in 2006, making her one of the most prominent female executives at a U.S. company.

Mr. Peltz, 71, who co-founded Trian in November 2005, is known for Trian’s so-called white papers, in which he outlines how he thinks businesses can be better run. During a proxy fight that Mr. Peltz waged in 2006 for five seats on the board of H.J. Heinz Co., he exchanged numerous barbs with then-CEO William Johnson, saying that Heinz investors “would have been better off financially keeping [their] $100 in a piggybank” during Mr. Johnson’s tenure.

There haven’t been any such public spats between Mr. Peltz and Ms. Rosenfeld. But Mondelez investors are likely to pay close attention to Trian’s next move as well as Mondelez’s next quarterly results, which are slated for Aug. 7.

Barclays Research analyst Andrew Lazar said in a research note that he expects Trian to push Mondelez to increase profit margins more quickly, adding that if Mr. Peltz’s coming meeting with Ms. Rosenfeld doesn’t placate him, “we wonder whether perhaps a [Mondelez-specific] white paper could be forthcoming.”

A Trian spokeswoman declined to comment on the firm’s future plans.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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