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Mondelez: Let's Get This Thing Sold

Consolidation in the packaged foods industry is real and activist investors Nelson Peltz and Bill Ackman want more of it; specifically, at Mondelez (NASDAQ: MDLZ). It could be the next buyout opportunity. 

Nelson Peltz of Trian Management owns ~3% of the company and has a board seat. He’s been pushing for change since Jan. 2014. Bill Ackman of Pershing Square holds a 7.5% stake and only recently started pushing for reform. Both Peltz and Ackman have a history with Mondelez, owning shares of Kraft Foods. They helped with getting Mondelez to split from Kraft Foods in 2012. 

Mondelez is now headed by Irene Rosenfeld, and both activist investors are targeting the leadership, with a specific focus on balance expenses and inflating profit margins in an industry currently focused on cost synergies. 

The grand plan

Ackman’s recent August intervention echoes the efforts from Nelson Peltz with an increased focus on cutting unnecessary advertising and product development costs. Similar to initial discussions with Peltz, Ackman is threatening to solicit takeover bidders if the company doesn’t improve near-term profit margins and better streamline its manufacturing cost structures. 

Discussionsare still gong on with regard to a potential board seat for Ackman, but the company is still under industry pressures after the successful Kraft Heinz (KHC) merger. Rosenfeld’s responses to Ackman’s recent urgings indicate that Mondelez has room to improve. 

In response to Ackman’s request for reduced advertising and product costs, Rosenfeld immediately sold the company’s corporate jet and further tightened its budget to help support sales. However, despite peaceful shareholder discussions and a likely board seat for Ackman, the pressures of the industry could likely result in Mondelez becoming a high-profile takeover target. In an industry facing tough competition given recent consolidation bidders such as Pepsi (PEP) could come knocking to help boost revenue and improve profits.

Mondelez has an optimistic outlook and recently strengthening stock price, and the discussions with activists have been peaceful for now. However, the company is still facing difficult industry challenges and competitive pressures. For the third quarter, Mondelez reported a comparable quarter revenue decrease of 18% with adjusted earnings per share down 16%. 

For next year, the company expects a slight improvement in profit margins with guidance for profit margins to come in between 15% to 16% in 2016. However, for investors it appears the company lacks significant momentum towards the end goal, leaving it vulnerable to a takeover and with a somewhat limited upside potential in the near-term.

From Ackman's 3Q letter on Mondelez: