Why Pepsi Should Consider Selling Quaker Oats (or Part of It)

NEW YORK (The Deal) -- When PepsiCo (PEP) acquired Quaker Oats in 2000 for around $14 billion in stock and debt, the Gatorade sports-drink business was the real prize.

After the deal closed, Pepsi considered selling the non-beverage portion of the Quaker unit. According to one industry banker, the potential sale was complicated by the need to de-lever the Quaker brand related to the parts Pepsi did not want -- namely the cereal business -- from the parts it wanted to keep, such as the granola-bar unit. That's because the Quaker brand name was used across a wide range of products.

Pepsi CEO Indra Nooyi, who was chief financial officer at the time, liked having Quaker as part of Pepsi because it offered a patina of supposedly healthier offerings. Nooyi continued to hold that view when she became CEO. Quaker's more wholesome image offset the parent's reputation for hocking foods high in sugar and fat, particularly with a group of customers that might include school districts and universities, not to mention food critics in general. In addition, health and wellness was -- and is still -- seen as an area of growth.

But Quaker's sales growth remains sluggish, and its cereal business badly trails its competitors, a group that includes General Mills (GIS), Kellogg (K) and Post Holdings (POST). For the fiscal year ended Dec. 27, Quaker had revenue of close to $2.57 billion, compared with about $2.61 billion for the same period a year prior, and also down from revenue of almost $2.64 billion in 2012, according to regulatory filings.

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