PepsiCo Not Poised to Split: Analyst

NEW YORK (TheStreet) -- Speculation that PepsiCo may be headed for a separation of its drinks and snacks businesses may be just that.

On the heels of Kraft Foods and Sara Lee's moves to slim down for profits by spinning off parts of their businesses, some analysts wondered if PepsiCo might do well to take similar action.

But "PepsiCo isn't on the road to Splitsville any time soon," said IBISWorld beverage analyst Agata Kaczanowska. Its "dual portfolio of snacks and beverages allows PepsiCo pricing flexibility in its highly competitive beverages business because it is balanced out by a strong market position in the snacks business."

Pepsi CEO Indra Nooyi has commented that the company's Frito-Lay operations could thrive as an independently run company, but has also said that marketing and distribution synergies for its dual snacks-beverages portfolio are too beneficial for the company to break the two up.

Kaczanowska pointed out that "in the US Soda Production industry the company has a 33.6% market share. It is second behind Coca-Cola (41.2%) and is facing increasing competition from private labels and Dr. Pepper Snapple (15.4%) ... Comparatively, Frito-Lay has a 48.4% market share in the Snack Food Production industry, with Kraft and General Mills far behind with just 5.2% and 5.1% market share, respectively. "

Kraft, which said in early June it would separate its snacks business from its North American grocery business by the end of 2012, highlighted a trend that consumer foods and goods makers need to focus on higher-growth emerging markets as the outlook for expansion in developed markets remains sluggish. The snacks business, with estimated revenue of about $32 billion, will consist of the current Kraft Foods Europe and developing markets units as well as the North American snacks and confectionery businesses. The North American grocery business would consist of the current U.S. beverages, cheese, convenient meals and grocery segments and the non-snack categories in Canada and food service.

Sara Lee said in January it would split itself into two by 2012 following unsatisfactory takeover bids, spinning off its North American retail and food service business, a company that will trade publicly and retain the Sara Lee name. That business includes brands such as Hillshire Farm lunch meat, Ball Park hot dogs and Jimmy Dean sausages. The other company, Sara Lee's remaining international bakery and beverages businesses, which includes Douwe Egberts and L'Or brands, was as yet unnamed but referred to as CoffeeCo and could be based overseas.

Fortune Brands , the maker of spirits such as Maker's Mark bourbon whiskey, Jim Beam and Effen Vodka, golf products under the Titleist brand, and home products like Moen faucets, said in December it would split itself into three separate companies. Its plan was to spin off its home and security division to shareholders in a tax-free transaction, sell or spin off its golf products business, and continue as a public liquor company. Fortune expects the separation process to be complete in the second half of this year.

Any type of Pepsi split would be more likely along the division of snacks and beverages, "and that doesn't make sense given Pepsi's long-term investments," Kaczanowska said. Still, speculation of a split circulated following these other major split announcements, overall market uncertainties and increasing commodity prices.

Kaczanowska believes that Pepsi is "poised to handle the increases in raw materials prices as it continues to grow in emerging markets," she added."The flexibility that diversified Pepsi's portfolio would be really compromised if it spun off ones of its divisions."

-- Written by Miriam Marcus Reimer in New York.

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