Activist investor William Ackman’s hedge fund is making a $5.5 billion investment in Mondelez International, a food giant based in suburban Chicago.
Ackman and his firm, Pershing Square Capital Management, aren’t saying much about the investment, which would give Pershing a 7.5 percent ownership stake in Mondelez. But analysts suspect Ackman wants to use his position to drive deeper cost-cutting steps at the manufacturer of snack foods like Oreos and Ritz crackers. If those efforts don’t succeed, Mondelez could go up for sale.
Bernstein analyst Alexia Howard says many big food companies are grappling with a shift in Americans’ tastes towards fresh foods and away from processed foods. That’s crimping revenue growth and driving industry consolidation as companies struggle to grow profits, though Howard notes that Mondelez has less exposure than some to such consumer trends.
“Mondelez only has 20 percent of sales in the U.S. And it’s in the U.S. where we’re seeing this big turnover in attitudes towards health and wellness,” she says.
Howard says Mondelez could stand to goose its revenue. But she suspects Ackman’s focus is “much more around the cost cutting and the margin potential.”
Morningstar equity analyst Erin Lash notes that just over a year ago, Mondelez announced a $1.5 billion plan to slash costs. But Lash thinks the tie-up of Kraft and Heinz, and the merged company’s subsequent cost-cutting spree makes Mondelez still look comparatively bloated in its cost structure.
“We think the combination of activist investor interest combined with the merger between Kraft and Heinz places a new bar for profitability,” she says.
Lash suspects if Mondelez can’t cut costs aggressively enough, it could be a target for Kraft Heinz in a year or two. Such a move would reunite Kraft and Mondelez, which had split into separate companies just a few years ago.
For now, it’s clear that Bill Ackman will hold a lot of sway in whatever happens at Mondelez, according to Bob Goldin, executive vice-president at Technomic, a food industry research and consulting firm.
“I’m quite certain there will be meetings with senior management quite soon, if they haven’t already begun today,” he says.