Activist investor Elliott Management invested $4 billion in PepsiCo, calling it a historic opportunity, with the stock price surging by as much as 5%

Elliott Investment Management has made a $4 billion bet on PepsiCo, aiming to push the iconic company to undergo a strategic restructuring to reverse its lagging performance.

According to data from FactSet on Tuesday, Elliott Investment Management, founded by Paul Singer, has invested $4 billion in PepsiCo, making it one of the top five active investors in the consumer giant, excluding index funds. Reports indicate that this activist investor has sent a letter to Pepsi's board and submitted a detailed reform proposal.

Elliott wrote in the letter:

While (past performance) has been disappointing, this poor trajectory has created a historic opportunity. PepsiCo today represents a rare chance to revitalize a leading global company and unlock significant shareholder value.

Elliott stated that its goal is to help Pepsi refocus on its core business, drive innovation, and improve efficiency, believing that through its proposed reforms, Pepsi's stock price has the potential to rise by at least 50%. Pepsi's stock price rose by as much as 5% during Tuesday's trading but closed with a much-reduced gain of 1.1%.

In response, PepsiCo stated that the company maintains positive and productive dialogue with its shareholders and will evaluate Elliott's views. The company also expressed confidence in its existing strategy aimed at driving sustainable growth.

Pepsi's Core Business Under Pressure, Market Value Shrinks

The backdrop of Elliott's stake is that Pepsi is facing increasingly severe operational challenges.

Reports indicate that Pepsi is struggling to win back soda consumers, with its core product Pepsi's sales in the U.S. having dropped to fourth place, behind Coca-Cola, Dr Pepper, and Sprite.

At the same time, the food business, once a growth engine (accounting for about 60% of the company's total revenue), is also under pressure.

Wells Fargo analyst Chris Carey noted in a report in June that sales growth in Pepsi's key North American food business has been slowing each quarter since peaking at the end of 2022.

Additionally, some independent Pepsi beverage distributors have stated that they have never seen the brand face such a difficult period and believe the company has shifted its investment focus to the food sector at the expense of its beverage business.

These challenges have collectively led to Pepsi's market value shrinking from a peak of about $270 billion in May 2023 to around $200 billion.

Elliott Pressures for At Least 50% Upside in Stock Price

In its letter to Pepsi's board, Elliott outlined a clear roadmap for its envisioned "path to revival."

The core recommendation from the firm is that Pepsi should evaluate the possibility of refranchising its bottling network, returning ownership to independent local bottlers. Competitor Coca-Cola completed a large-scale re-franchising plan in 2017, and its market value is currently close to $300 billion, with its stock price near historical highs.

In addition, Elliott has urged PepsiCo to streamline its vast product portfolio and divest non-core and underperforming assets. The firm believes that PepsiCo should provide investors with a more specific performance improvement plan to restore market confidence.

This action once again highlights Elliott's style as one of the world's most active activist investors.

The fund manages over $70 billion in assets and is known for driving change in several well-known companies. Recently, Elliott has held significant stakes in companies like Honeywell and Southwest Airlines, actively pushing for reforms.

Last year, Elliott also invested in Starbucks and played a role in the process of the coffee giant changing its CEO, at a time when Starbucks was similarly facing challenges of declining sales and changing consumer preferences. Elliott's successful track record undoubtedly adds more weight to its actions against PepsiCo.

PepsiCo responds to the evaluation proposal but is confident in its existing strategy

In the face of pressure from activist investors, PepsiCo has shown an openness to dialogue while defending its existing strategic initiatives.

In a statement, the company said it would review Elliott's views in conjunction with its own strategy for driving sustainable growth and values constructive communication with shareholders to achieve long-term shareholder value.

In fact, before Elliott's intervention, PepsiCo had already been taking measures to address challenges.

Since taking office in 2018, CEO Ramon Laguarta has been committed to providing greater value to consumers. Specific measures include:

• Reducing costs by closing two factories in its North American food business;
• Integrating logistics for beverage and snack businesses to improve efficiency;
• Reevaluating marketing expenditures to ensure maximum return on investment.
• At the same time, the company plans to reintroduce core snack brands like Lay's and Tostitos without artificial ingredients.

In the latest financial report in July, PepsiCo's performance exceeded analysts' expectations, and it is anticipated that weak North American demand will rebound as strategic adjustments take effect