PepsiCo to spin off restaurant business Bottler narrows focus;Taco Bell, Pizza Hut, KFC hurt bottom line

THE BALTIMORE SUN

NEW YORK -- In a move that had been anticipated, PepsiCo Inc. said yesterday that it will spin off its restaurants and possibly sell its restaurant supply company to focus on its more profitable and promising soft drinks and snacks.

Pepsi will shed its biggest line of business -- KFC, Taco Bell and Pizza Hut -- which it has assembled over two decades, because it has dragged down earnings and chewed through much-needed capital. It didn't give the terms of the spinoff, though it expects to complete it by year-end.

Chief Executive Roger Enrico, who took the reins in April, will concentrate on making Pepsi's soft drinks more competitive worldwide against surging rival Coca-Cola Co. and accelerating the expansion of Frito-Lay snacks overseas.

"The company's growth rate has been depressed by the restaurants," said analyst Anne McDermott at Sovereign Asset Management, a unit of John Hancock Funds that holds 880,000 shares.

Pepsi also said it will consider the sale of its PepsiCo Food Systems unit, which distributes more than $3 billion worth of restaurant equipment and supplies each year -- primarily to its own restaurants.

Shares in the Purchase, N.Y.-based company rose $3.50 to $35.50 in trading of 31 million shares, seven times its three-month daily average of 4.3 million. It was the most-active issue on U.S. markets.

The spinoff could have a value of about $5.50 a share, or $8.54 billion, depending on the number of Pepsi shares outstanding and how much debt Pepsi shifts to the restaurants, said Alec Patterson, an analyst at RCM Capital Management, which holds about 5.2 million shares.

That would rank it the sixth largest U.S. spinoff ever, said Securities Data Co. The biggest was General Motors Corp.'s $28 billion spinoff of Electronic Data Systems Corp. in June, according to Securities Data Co.

Pepsi operated about 9,925 restaurants in the United States as of Sept. 7.

Shareholders have clamored for Pepsi to sell or spin off the restaurants. One or another of the chains has regularly run into trouble -- hurting earnings or creating writeoffs.

"I don't think the restaurant business earns its cost of capital, which is 11 percent," said Credit Suisse First Boston analyst Martin Romm.

Although restaurants are Pepsi's largest business with an estimated 36 percent of its $31.8 billion in sales last year, they accounted for about only 22 percent of its operating profit, said Oppenheimer & Co. analyst Roy Burry.

The spinoff will create the nation's second largest restaurant business behind McDonald's Corp. based on 1995 sales, according to Technomic Inc.

McDermott, who had recommended the stock at $29, said Pepsi's shares could rise higher than $38 now on a spinoff.

"I would buy it here," she said.

A spinoff will probably improve Pepsi's credit quality because it would allow executives to build up soft drinks and snacks, Fitch Investors Service LP analyst Thomas Hoens said in a report.

One of Pepsi's biggest challenges is to boost sales of its U.S. fountain drinks, or sales in restaurants, cafeterias and other outlets, said Beverage Digest publisher John Sicher.

Coke has made inroads in the fast-growing market by arguing to potential customers that Pepsi's restaurants compete with their chains. Coke holds more than 60 percent of that business, while Pepsi has about 20 percent to 25 percent, Sicher said.

Pub Date: 1/24/97

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad
50°