August 6, 2015

Activist investor William Ackman’s Pershing Square Capital Management, has taken a $5.5 billion stake in Mondelez International believing that the packaged food giant will be the next big target in a wave of mergers and acquisitions sweeping the food sector. This investment is one of the largest ever made by an activist investor, with the stake amounting to approximately 7.5% of the company including forward contracts and options.

Mr. Ackman believes, according to Wall Street Journal reports, that Mondelez must rapidly grow its revenues and deeply cut costs, or sell itself to a rival company. But, with a value of $75.6 billion, few companies would be able to afford such a move. Wall Street Journal suggests that one possible buyer could be the recently formed Kraft Heinz Co. which has a market cap of $97.6 billion and which acquired Mondelez’ former North American Kraft Foods Group Inc. earlier this year. A company spokesman declined to comment on the possibility. A second possible buyer could be PepsiCo, who’s business includes Frito Lay and Quaker Foods, and which saw revenues of $35.34 billion last year.

If a takeover were to occur however, it would be one of the largest in a series of consolidations in the food space over the past two years, brought on by a slowdown in growth in global food companies, which are struggling to adjust to shifting consumer demands in favor of fresher, more transparent products. Consolidation offers opportunities to lower costs, and increase efficiency and scale.

If purchased by Kraft Heinz, Mondelez would be subject to Kraft’s new management, 3G’s aggressive cost cutting methods. The Brazilian private equity firm, which has partnered with Warren Buffet on various deals including the Kraft Heinz takeover, has been intensifying the pressure on its competitors in the food space, and is expected by industry insiders to continue to acquire additional food companies.

Since joining the Mondelez board, Trian Fund Management LP co-founder, Nelson Peltz has been backing aggressive cost cutting methods including 3G’s method of ‘zero-based budgeting’ whereby managers must justify all costs within every year, shuttering underutilized factories, and the implementation of upgraded production facilities that will reduce costs. Combined with the fact that the strong U.S. dollar has enabled the group to raise prices for its products overseas, the company has increased its adjusted operating margin by 2.7% in the last quarter, and raised the value of its shares by 27% this year.

Pershing Square and Trian are two of the biggest activist investors in the world – acquiring stakes in companies and pushing for actions that they believe will raise the company’s value such as breakups, cost cutting, and buybacks. Pershing Square now manages in excess of $20 billion, and Trian, which has announced it has two new large investments in the pipeline, manages approximately $12 billion in assets.