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Pepsi Challenge: Where's the Pact Between Mondelez and Trian?

Stocks in this article: MDLZ PEP

NEW YORK (TheStreet) -- How come Mondelez International  (MDLZ), in allowing Trian Management's Nelson Peltz on its board of directors, isn't disclosing a pact that will bar the activist hedge fund from pressing for a sale of the company to PepsiCo (PEP)?

So far, all Mondelez investors and employees have to go with is a report of a pact with Trian Management first reported by CNBC's Andrew Ross Sorkin. TheStreet spoke to Trian Management about the pact, which the fund confirmed citing information already leaked to the press.

Still, it's unclear whether Mondelez shareholders or employees should bank on Trian Management's word that it has agreed to terminate efforts to sell the company to PepsiCo, another large holding of the hedge fund.

There is no mention of any pact from Mondelez or Trian Management in press releases or filings with the Securities and Exchanges Commission. All investors have to go with is leaked information to the business press. It's also unclear whether the pact would bar Trian from advocating corporate actions that could create conflicts of interest for the company.

"Mr. Peltz is subject to a confidentiality agreement similar to all of our directors, but there are no transactions between Mr. Peltz and us that would be reportable under Item 404(a) of Regulation S-K," Michael Mitchell, a Mondelez spokesperson said in an email.

Not the most convincing thing you've ever heard?

With Peltz and Trian on-board, Mondelez's board of directors will now expand to 12 members. Peltz will be included in the company's slate of nominees for election at its 2014 annual shareholder meeting.

"As one of the company's largest shareholders, with a current beneficial ownership of more than 46 million shares, Trian has long seen enormous opportunities in the company's portfolio of strong global brands," Peltz said in a statement on Tuesday.

"Irene Rosenfeld is a CEO who has created substantial value for shareholders over the course of her career. I look forward to working closely and constructively with Irene, the Board and management team toward our shared goals of driving growth, improving margins and increasing value for all shareholders," he added.

If a pact with Peltz and Mondelez does exist or is eventually disclosed by the company, it would put an end to speculation that the hedgie would press for a merger of the company with PepsiCo. Trian Management took large stakes in Mondelez and PepsiCo in the first quarter of 2013 and advocated for a merger between both companies soon thereafter.

Peltz will now press his "Plan B" for PepsiCo shares, a split up of the company's foods businesses from its iconic soda businesses. "Given that Pepsi's not interested in Plan A, we are encouraging them to pursue Plan B," a Trian spokesperson said.

In July, Trian Management released a white paper recommending the soda and snack foods giant should merge with Mondelez and use the deal to also spin off its beverages business. Such a move would create substantial cost and revenue synergies that could improve Pepsi's operating margins and capital structure, according to Trian Management. The fund said a merger could lead to approximately share values for PepsiCo and Mondelez of $175 and $72 a share, respectively.

Trian has also advocated a 'Plan B' if PepsiCo does not pursue a merger with Mondelez, advising that the company should simply separate its snacks and beverages divisions, potentially making each division more straightforward and valuable.

Prior to his election to on Mondelez's board and a pact with the company, Peltz appeared poised to press both sides of what would have been one of the biggest-ever mergers in the food and beverage industry.

The fund also has experience playing both sides of a company's strategic planning and has been instrumental in many food and beverage industry turnarounds.

In 2007, the Trian took sizable holdings in Cadbury's and Kraft Foods and advocated change at both companies. Specifically, Trian Management said Cadbury should spin off its beverages businesses to streamline operations that spanned from chewing gum to candieas and sodas. At roughly the same time, Trian Management took a large holding in foods conglomerate Kraft and gained two board seats, after agreeing not to seek control of the company.

Three years later, Kraft bought Cadbury in a near $20 billion transaction that paid off for the hedge fund. Warren Buffett's Berkshire Hathaway, a top Kraft shareholder, voted against the transaction. Still, the deal went through and Trian sold its shares in Kraft shortly after Kraft's acquisition closed.

Roughly a year later, Trian was back again in Kraft shares. Within a few months, Kraft said it would split off its grocery businesses from its snacks businesses. That split, a corporate action that Berkshire Hathaway supported, paved the way for the listing of Kraft Foods grocery business and the continued listing of the legacy snacks business under Mondelez.

Shares in both companies have performed strongly since the 2011 spin off.

For shareholders that held Mondelez and Kraft Foods stock after the split, the deal appears to have paid off. One old Kraft share is now worth about $52.50 a share given the terms of the split. Prior to the split, Kraft shares had languished below $40 a share.

Peltz Playing Two Sides of Pepsi & Mondelez?

Peltz's pact may pave the way for change at Mondelez even if a deal with PepsiCo is not in the cards. In fact, maybe there is a similar opportunity for the hedge fund to get Mondelez and its CEO Irene Rosenfeld back in the M&A game.

Mondelez, after all, would be one of most likely acquirers of Frito-Lay were Pepsi to decide to separate its beverages and foods businesses. Since no pact has been formally disclosed, it's unclear whether a pact precludes the hedge funder from pushing Mondelez to seek the acquisition of PepsiCo assets.

-- Written by Antoine Gara in New York

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