Should PepsiCo Go 'Asset-Light' Like Coca-Cola?

Much has been written about The Coca-Cola Co (NYSE: KO) creating a more asset-light model by divesting most of its owned bottling assets. Nomura’s Ian Shackleton pointed out that a higher ROIC could result in more returns to shareholders.

Similar Strategy By PepsiCo

If PepsiCo, Inc. (NYSE: PEP) were to strip out owned bottling assets in North America and Europe, this could up the group ROIC from 17 percent to 25 percent, with +600bp in NA and +200bp in Europe, analyst Ian Shackleton said. This would release about $15bn in cash.

He added, however, that in the absence of a dedicated bottler network like what Coca-Cola has, it is less clear how PepsiCo would achieve this.

A disposal of NA/Europe bottling could dilute EPS by 6 percent. However, if cash proceeds are returned via a buyback, this dilution would reduce to 3 percent. Shackleton further mentioned that such a divestment would change the profit skew for food/beverages from 60/40 to closer to 75/25.

“This raises the question of whether PEP beverages can compete with KO globally, and we consider a theoretical end game solution involving a merger with several other beverages companies, which could leave a better competitive position,” the analyst wrote.

Shackleton maintained a Neutral rating for PepsiCo, with a price target of $100.