Pepsi acquisition of Mondelez?

Activist shareholder Nelson Peltz has recently gone public about his latest bid to shake-up the consumer package goods industry by pushing PepsiCo Inc to buy Mondelez International Inc for more than $62 billion. As part of his plan, Pepsi would then spin-off its soft drink business to become a global snack food behemoth.

Give Peltz point for thinking big and seeing the power of a tremendous power combination. Pepsico is a $65 billion dollar beverage and food conglomerate with 22 billion dollar brands. It includes it's Pepsi-Cola beverage division, Frito-Lay brands, and Quaker, Tropicana and Gatorade. The Frito-Lay North American business unit is a $13 billion business with a clear #1 share of the snacks category. While Mondelez is a self-described "$35 billion, global snacks powerhouse" sold across 165 countries and 9 billion dollar brands.  It's power brand portfolio primarily covers the biscuits category (e.g., Nabisco, Oreo, Chips AhoyWheat Thins, Triscuit, Ritz) and Chocolate/Candy/Gum (e.g., Cadbury, Toblerone, Trident, Halls). The combination of these two companies is initially a bit mind-boggling.

Potential Benefits:

• Given Frito-Lay already owns the salty-snack aisle, while Mondelez's Nabisco owns the cookie/cracker aisle, the merger would give the new company dominant control of the snack section of your grocery store. This scale would give the company incredible negotiating power with suppliers/retailers and create significant advantages over remaining competitors.  
• The deal could offer huge potential cost savings by combining direct-store-delivery (DSD) networks as well as expanded DSD reach for Nabisco into the convenience store channel
• It also creates large international expansion opportunities for Frito-Lay by leveraging Cadbury's legacy international sales & distribution networks (Kraft purchased Cadbury for nearly $20 billion dollars in 2010 before the company was split into Kraft and Mondelez to leverage these networks to boost its own international expansion) 

Potential Challenges:

• Pepsico is said to be resistant to the idea of spinning-off its beverage business. That said, the Kraft/Mondelez split was also initially surprising, so while this is a challenge, it may not be an immoveable barrier
• Mondelez has under-performed expectations since the Kraft spin-off, weighed down by economic woes in Europe among other factors, and a merger with Pepsi does nothing to help ignite top-line growth. Without steady growth, Mondelez is significantly less appealing
• While the combined snack food behemoth would surely benefit from international expansion into fast growing developing markets, its lack of product diversification could put its core US business at risk to rising health trends in the US and in the rest of the developed world (much like the Pepsi soda business is today)
• There are also likely major cultural challenges in merging Mondelez and Frito-Lay. For example, the two companies have historically had very different brand management frameworks. Mondelez/Kraft has a very well respected general management approach, while Frito-Lay has historically focused their marketers energy more towards advertising. It would be interesting to see where a joint organization would end up. No doubt the cost of merging the two organizations together would be costly and the integration likely taking years to come to full fruition
• You'd have to imagine that a deal this size would at least raise some anti-trust caution flags, given the concentration in the snack food and the DSD structure of the category that essentially makes it nearly very difficult for new competitors to win shelf space

Initially the idea seemed very farfetched, but the more you consider the tremendous scale opportunity from the potential acquisition/merger it actually becomes quite an intriguing possibility that would no doubt remake the CPG landscape. 

That said, even if Peltz is able to convince the boards and shareholders, a lot would still have to go right for the merger to be a success. Take for example the P&G and Gillette merger. While one could argue that the P&G acquisition of Gillette has been a large success, much of the upside P&G initially thought it could easily capture by slapping the Gillette brand on its historic female skin/body care capabilities to win in men's skin/body care still hasn't come to fruition despite several years of trying and hundred of millions of dollars in investment.

It will be interesting to see how the Pepsi/Mondelez situation plays out, if nothing else its fun to think about the potential of the combination.