PepsiCo in No Rush to Make a Major Acquisition, Says CFO

Despite its strong cash position and the deal frenzy in the industry, don't expect PepsiCo to make any hasty decisions on the acquisition front, says Hugh Johnston.
By Brian Sozzi ,

Despite the renewed frenzy for mega deals in the packaged food space, one giant is apparently content with staying on the sidelines.

"We feel like now we are operating from a position of strength," PepsiCo (PEP) - Get Report Vice Chairman and CFO Hugh Johnston told TheStreet when asked if the beverage and snack maker needed to do a big deal. "In terms of some of these bigger deals that have been announced out there, if we haven't done a deal I think you could assume that's because we don't think it's in our shareholder's interest."

Johnston's comments come on the heels of some major deal news in the packaged food industry.

Yogurt maker Danone fired the latest bazooka shot on Thursday by announcing it would acquire organic food producer WhiteWave Foods (WWAV)  for $56.25 a share, or an enterprise value of $12.5 billion. The value of the deal represents a premium of about 20% over WhiteWave's closing market cap on July 6.

By adding WhiteWave's organic dairy portfolio, Danone will shoot up to a leading position in the U.S. refrigerated dairy market, becoming one of the top 15 largest U.S. food and beverage manufacturers in terms of sales. One the transaction closes, Danone's North America footprint would increase to 22% from about 12% of its total portfolio. 

"We are the first to understand just how enticing the WhiteWave asset is within the consumer packaged goods landscape desperate for growth," wrote Jim Cramer and Jack Mohr, portfolio managers of the Action Alerts PLUS Charitable Trust Portfolio, which owns WhiteWave, in a note after the deal was announced. "The company is a double-digit grower in a sector desperate for growth, and that can't be ignored." 

The marriage in the dairy space comes a few days after a proposed tie-up among candy and snack makers. Mondelez (MDLZ) - Get Report , which makes Oreo cookies and Cadbury chocolate,  recently announced it had made a $23 billion cash-and-stock bid for iconic chocolate maker Hershey (HSY) - Get Report . Hershey quickly rebuffed Mondelez, however, but Mondelez didn't say it was through trying to pursue a deal.

Indeed, PepsiCo has the balance sheet to do something big. The company generated a massive $8.1 billion in free cash flow in 2015, created in part by billions of dollars in cost savings measures and steady top line growth. So far this year, the company has raked in over $2 billion in free cash flow. It had $13.4 billion in cash and and short-term investments on the balance sheet as of the quarter ended June 11. 

For 2016, the company estimates it will have more than $7 billion in free cash flow. PepsiCo also has strong credit ratings from S&P and Moody's, which would allow it to borrow relatively cheaply to fund a significant purchase if needed.

PepsiCo's history is filled with big transactions, the most prominent being its combination with snack maker Frito Lay in 1965. In 1998, PepsiCo purchased Tropicana for about $3.3 billion. Then in 2000, the company plunked down a colossal $13.4 billion to buy Quaker Oats, which also gave it access to the coveted Gatorade brand. The company's 2006 purchase of Izze for an undisclosed sum gave it access to the hot-selling sparkling water category, while in the same year it gobbled up juice brand Naked for an undisclosed amount.

The company's last huge brand acquisition was Russian dairy products and fruit juice maker Wimm-Bill-Dann for about $5.4 billion in 2010.

But Johnston dispelled any thoughts of any big deals like this on the horizon. "We expect to do small tuck-in acquisitions," said Johnston.

Guess we shouldn't be holding our breath for a PepsiCo acquisition of a company like  Hain Celestial (HAIN) - Get Report  or Amplify Snack Brands (BETR) .

PepsiCo is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells PEP? Learn more now.

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