Here we go again. With the dust still settling from the deal he brokered between Valeant Pharmaceuticals (VRX) and Salix Pharmaceuticals (SLXP), and with his campaign against Herbalife (HLF) sill hanging in the balance, Bill Ackman has now taken on a huge stake in snack foods company Mondelez International (MDLZ), presumably as part of an effort to unlock its true value.
The big question the market is asking in the wake of the news: What exactly is Bill Ackman hoping to accomplish with MDLZ that other activist investors — and its previous owners — couldn’t?
Bill Ackman Now Owns 7.5% of MDLZ
The news was released last night — manager of hedge fund Pershing Square Bill Ackman now owns a 7.5% stake in, or $5.5 billion worth, of Illinois-based food company Mondelez International.
His interest in the maker of Oreo cookies, Trident gum, and Cadbury chocolate (just to name a few) isn’t crystal clear. But given Ackman’s history, it’s not difficult to assume he ultimately wants to cut costs, piece together an acquisition of the company, or both.
Neither is a particularly crazy idea, for multiple reasons.
First, though not foremost, Mondelez could indeed use some help. Though it has an enormous market presence, its margins have been lackluster of late, and sales growth has been anemic as consumers migrate towards healthier eating choices. MDLZ acquired Enjoy Life brands earlier in the year to add several allergen-free food products to its portfolio — just one of many deals it has made lately — and the company has cut costs, some of which were culled when Mondelez moved some of its production to Mexico.
It’s still not enough, though. In Q2 of this year, even as sales and profits topped expectations, both were down significantly on a year-over-year basis. A presence like Ackman’s has historically accelerated changes for the better. (Even those who don’t like the guy have to respect his results on that front.)
The bigger reason MDLZ is indeed a buyout candidate, though, is the simple fact there is a wave of M&A underway in the food space right now. MDLZ could soon find itself in someone else’s sights, if for no other reason than some company wants to prevent a competitor from grabbing it.
Case(s) in point? Kraft Foods Group became Kraft Heinz Foods (HNZ) in early July, when the two iconic names joined forces in part to save up to $1.5 billion between them by 2017. And, though a federal judge untimely balked at the pairing before it could take shape, in June, SYSCO Corporation (SYY) made an acquisition play for privately-held U.S. Foods.
Food companies are looking … provided they aren’t buying into a cash-draining money pit. That’s where Bill Ackman may be able to work a little magic.
On the Other Hand…
Just as a reminder, Mondelez International was the same company that Kraft — before it teamed up with Heinz — spun off in late 2012 with the explicit purpose of splitting two distinct operations in the name off better effectiveness; MDLZ was to focus on the high-growth overseas snack market.
In the meantime, Kraft Heinz Foods has been named as s possible suitor Bill Ackman could pitch a sale to. But that idea raises the question … if Kraft specifically didn’t want to be under the same roof with Mondelez three years ago, how does bringing Heinz into the mix suddenly make Mondelez a good fit again?
(Answer: It doesn’t.)
Snack food and beverage company PepsiCo (PEP) was also pegged as a potential buyer. But that union was already rebuffed by PepsiCo in early 2014. It’s unlikely the upside of such an acquisition has improved in the meantime.
And therein lies the rub: Everyone likes the idea … except for the companies that would actually have to pay for it.
Bottom Line for Mondelez
While Ackman’s investment is founded on the premise of cost-cuts, or an acquisition, or both, investors should understand that neither has to happen anytime soon to spur MDLZ shares higher. The buzz itself may well be enough do the job, even if the job is to light a fire under Mondelez International’s management.
One thing is for sure, though. If Bill Ackman has the idea in head, he’s not going to let it go anytime soon.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
