PepsiCo to spin off Pizza Hut and KFC

Friday 24 January 1997 01:02 GMT

PepsiCo is expected to announce a multi-billion dollar demerger of its Kentucky Fried Chicken, Taco Bell and Pizza Hut restaurants to concentrate on the cut-throat battle with Coca-Cola for dominance of the soft drink market and its Frito-Lay snacks business.

The company's board met yesterday, although a spokesman refused to confirm or deny press reports in the US that the restaurants were to be spun off. If the deal goes ahead, it would be the first significant move by the new chief executive, Roger Enrico, who took the reins at Pepsi last April.

Shareholders have called for some time for PepsiCo to sell or spin off its underperforming restaurants, which have failed to live up to expectations ever since the company entered the business 25 years ago.

One or more of the chains has consistently caused problems in recent years, dragging group earnings lower and soaking up the company's capital spending and management time. Analysts believe the business has failed to earn even its cost of capital.

Although restaurants are Pepsi's largest business with an estimated 36 per cent of the group's $31.8bn (pounds 19.6bn) in sales last year, they accounted for only about 22 per cent of its $3.7bn profit.

A spin-off would create one of the biggest restaurant companies in the US. PepsiCo is the second-largest restaurant operator by sales in America after McDonald's.

The prospect of a demerger was welcomed by shareholders and bondholders alike, with Fitch Investors Service, the credit analysts, saying a separation would improve Pepsi's credit quality because it would allow the company to concentrate on its soft drinks and snacks operations.

Coke has been consistently gaining market share at Pepsi's expense throughout the world, a record that has been reflected in a sharply better share price performance and the gain of some overseas bottling contracts from its rival.

Despite pumping more than $2bn into its bottling operations in recent years, Pepsi only accounts for about a fifth of the soft drink market overseas, where it also sells brands such as 7Up and Mountain Dew.

It is widely thought that the acquisitions of Pizza Hut in 1977, Taco Bell a year later, and Kentucky Fried Chicken in 1986 helped take its eye off the ball in its main battle. Last year, Christopher Sinclair, the 45- year-old head of Pepsi's global beverage operations, resigned after just four months in the job, citing personal reasons.

In 1995, the most recent figures available, Pepsi owned 5,200 Pizza Hut restaurants and had franchised a further 3,700. It had a total of almost 6,500 Taco Bell owned and franchised outlets and more than 5,000 KFC restaurants.

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