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Summary

  • Pepsi continues to be undervalued with potential for food and beverage unit splits.
  • Combination of Chobani and Muller Joint Venture would make Pepsi a key player in growing yogurt market.
  • Chobani invading Pepsi's oatmeal dominance.

(Photo from Food Navigator)

Pepsi (NYSE:PEP) was one of my top ten stock picks for 2014 at the start of the year. I cited three reasons with the potential split of the beverage and food units being the top one. With Nelson Peltz's continued focus on splitting the company up, I believe shares are undervalued. To further the growth of its food division, I believe Pepsi should acquire Chobani before it enters its territory.

Pepsi should be slightly scared that Chobani is entering the oatmeal market, where its Quaker brand currently dominates. Chobani is launching desserts and oatmeal products to take on customers three meals throughout the day. The company wants "to offer better food for more people throughout the day". A total of six new products will launch in June.

Chobani Indulgent dessert sees Greek yoghurt mixed with fruit a cream. This new item will begin with four flavors. Chobani Greek Yogurt Oats have "a cup of protein, grain and fibre-packed nourishment for those looking to start their day off right". This item will feature Greek yoghurt with fruit and oats and be available in four flavors.

Chobani is also bringing a low sugar yogurt option for kids to the market. It appears there is more food items coming from Chobani. The company's CEO and founder Hamdi Ulukaya said, "We're just getting started" when discussing the new items coming in June.

Pepsi should be slightly scared that a company with strong name brand recognition is invading its oatmeal department where it has had much success since a merger with Quaker. In February, Forbes cited Pepsi having a 57% market share of the hot cereal market.

A purchase by Pepsi would not only help the company fight off a competitor in oatmeal, but also give Pepsi a better presence in yogurt, which is currently seeing strong growth. Yogurt now makes up 40% of the breakfast market, representing the number two most consumed breakfast item in America. Retail yogurt sales hit $7 billion in the United States last year. Yogurt has seen 8.5% average annual growth over the last five years. Euromonitor forecasts yogurt will grow an average of 5.9% each of the next five years.

Greek style yogurt, which is Chobani's specialty, makes up 40% of the U.S. yogurt market. Chobani is now the second biggest yogurt brand behind market leader Yoplait (NYSE:GIS), who has a 24% share. Danone (OTCQX:DANOY) has the greatest overall share with 30% when adding up all its yogurt brands like Dannon, Activia, Stonyfield Farm, and Danimals. Through February, Chobani had a 19% overall yogurt share and 38% share of the Greek yogurt market.

Pepsi has a joint venture with Theo Muller called Muller Quaker Dairy. Theo Muller is a strong brand in the United Kingdom, but is only beginning to bring its name to the United States. The brand continues to expand in the United States with its Corner, GreekCorner and Fruit Up brands. The joint venture, which formed in 2011, just recently opened a new yogurt manufacturing facility.

Theo Muller Group is Germany's largest privately held dairy business and one of the most well-known yogurt companies in Europe. In Europe, yogurt per capita consumption is double the amount in the United States. The combination of this joint venture and Chobani would give Pepsi a huge position in the yogurt market and the ability to take on leaders Danone and Yoplait.

Pepsi should be moving in soon on Chobani, who just received $750 million from TPG Capital. The company is likely to hit an IPO within the next two years and could see an inflated price with strong name recognition. The investment from TPG could give away 35% of the business, valuing Chobani at up to $2.1 billion.

The money from TPG will help with new product lines and help international sales. Chobani reports it saw an abundance of interested parties. The deal comes as a loan that includes warrants. The loan is for six years. TPG's involvement also specifies that Chobani is in the search for a new CEO. TPG will also have two seats on the board. Pepsi could buy the company now at a higher valuation and give TPG a quick profit and get in before this company ever sees the public market.

Chobani remains a privately traded company. The new investment from TPG shows the current valuation for Chobani, but most private equity investments come in at lower valuations than IPOs. Chobani is a rumored IPO target for the next year. If Pepsi lets Chobani hit the open market it would likely increase a possible buyout price.

Pepsi continues to see its food division carry the company forward. In the recent first quarter, total revenue increased 4%. The Pepsi America Foods division saw organic revenue of 5%. The split between the two main units, PepsiCo Americas Foods and PepsiCo Americas Beverages continues to be close in terms of revenue. PepsiCo Americas Foods had first quarter revenue of $5.19 billion, compared to the $4.43 billion posted by the Americas Beverages

Nelson Peltz continues to pressure Pepsi into splitting the company into beverages and food standalone companies. He at one time suggested a merger of the food unit with Mondelez International (NASDAQ:MDLZ). Pepsi has fought against this proposal. Recently, Peltz asked for details why the company refused to split. The current battle is a distraction, but the unlocked value of the fast-growing snack business is there. I believe Pepsi should buy Chobani and consider spinning off its food business into a new company. There is no need to have Mondelez involved, as Pepsi can go at the food business on its own and continue to buy strong growing brands.

If Pepsi doesn't buy Chobani, I think it could still start acquiring small food companies. I believe Peltz is right to want to see Pepsi split its company into two components. Buying Chobani would strengthen the company's food division. Letting Chobani grow from the TPG investment and move into other categories could hurt the growth of Pepsi's food products. Pepsi could see market share of oatmeal and other products fall as Chobani enters new markets. Chobani's continued growth in the yogurt category also hurts Pepsi's joint venture with Muller Group.

In my top ten stock picks article I cited breakup/merger rumors, strong snack food growth, and dividend yields/buybacks as the top three reasons to buy shares of Pepsi. Buying Chobani hits on the first two reasons and would greatly boost the yogurt and oatmeal category for Pepsi going forward.

Source: Pepsi Should Buy Chobani Before It Faces Head-On Competition