Ackman Plunges Into Mondelez, Wants To Undo Kraft Spin

Poor Irene Rosenfeld. The former CEO of Kraft Foods was badgered by Nelson Peltz’s Trian Group into breaking up her empire in 2012 into the slow growing, North American grocery business, Kraft Foods Group, and the international snack food company Mondelez International (MDLZ). She remained at the top of Mondelez and also (rightfully) took a lot of heat for the awful name choice too. Mondelez, with its faster growth and international profile, was supposed to be the star company post-spin, but Kraft was actually the one that took off after delivering improved margins. Funny how that works. Mondelez struggled operationally and had a few missteps leading to lackluster returns and ultimately, the re-engagement of Mr. Peltz. This campaign featured Trian pushing for a forced marriage between Mondelez and Pepsi’s (PEP) snack business, but both companies successfully fought off the idea. In return for dropping his push, Mr. Peltz was named to Mondelez’s board and he has since urged the company to cut costs. Recently, despite some external headwinds like currency, the company has been delivering solid results leading to strong gains year to date. One might think that this would afford the CEO a pat on the back or at least a little breathing room, but in fact, it attracted one of the biggest activist funds to the party. The big news yesterday was that Bill Ackman’s Pershing Square had acquired a $5.5 billion stake in the company, one of the largest activist positions ever equivalent to 7.5% of the shares outstanding.

So what is the big idea here? Mr. Ackman is pushing the company to grow faster, cut costs and improve margins or to pursue a sale. Easy peasy. One of the headline grabbing notes was the identity of a possible buyer – Kraft or now Kraft-Heinz (KHC) following its acquisition by a 3G Capital led group including Warren Buffett’s Berkshire Hathaway (BRKA). While consolidation has a been a big trend in the food space, Mondelez and its $70+b market cap is a pretty big bite to digest, even for Kraft Heinz. Remember, that company took on a lot of debt to complete the Kraft purchase and is currently working hard on integration efforts. It might take some time before they are interested in tackling another monster acquisition. Additionally, a deal would represent a strategy reversal and essentially undo the spinoff. There is some question as to why that would make sense. Of course, ‘things are different now’ or there is new ownership are being tossed about, but it would still be a big about face. Fortune also questions whether Buffett and 3G would be interested in paying the necessary price, possibly 30x earnings, to acquire Mondelez. The company has already cut over $2b of costs, so 3G may be less willing to pay a premium multiple on the back of potential dramatic cost synergies.

The WSJ had a quote from a Mondelez spokesperson saying that ‘we welcome Pershing Square as investors in our company…we’ll continue to focus on executing our strategy and on delivering value for all our shareholders.’ Suuure. Ms. Rosenfeld has certainly dealt with a lot of activists in the past, but will now feel the squeeze of two of the world’s biggest. The pressure will be on the company to continue delivering and even then, a sale might ultimately be pursued. Perhaps the Pepsi idea will come back? Investors initially sent MDLZ soaring over 4% on the news, but the company ended up closing up just a little under 1%. Analysts, acknowledging the limited set of buyers of a company of this size, apparently do believe there will be interest in acquiring the company, but it may be further down the line. Additionally, they also believe there is room for margin improvement, with Kraft-Heinz setting a high bar on that front.

The fun is just getting started (again) and Mr. Ackman is nothing if not entertaining to follow. I just can’t wait for the 300 slide presentation to come out. Hopefully there won’t be any tears this time.

Disclosure: Author owns shares of Berkshire Hathaway B shares and enjoys too many of Mondelez’s brands.