“ A dollar on the balance sheet is worth a dollar, but a dollar on the income statement is worth $20.” – Nelson Peltz
Background and Bio
Nelson Peltz’s success story is similar to most college dropout success stories we hear. Not unlike Einstein, Steve Jobs, and the many stories we have already heard, Peltz withdrew from his university in the middle of his undergraduate degree in the 1980s.
Afterwards, he joined the family business of frozen food products and drove a distribution truck for $100 a week. After taking control of the business, he later sold it for a massive $8 million profit.
Back then, he also acquired $1 billion in junk bonds, along with his partner Peter May and turned Triangle Industries into a Fortune 100 company. Triangle Industries is a packaging company and Peltz and May were able to turn its fate around and transform it into one of the world’s top packaging companies.
However, Triangle Industries was just the beginning of his many successes. The company was later sold to the French company Pechiney after acquiring many companies, amongst which the two most noteworthy are National Can and American Can. As a result of these mergers, shareholders recorded massive returns of up to 800%.
Subsequently, two companies were formed that derived their name from his first successful acquisition and sale. The companies, Triarc and Trian are co owned by Peter May and Nelson Peltz, and act as holding companies for the companies they acquire and transform.
One of Peltz’s most famous examples was the acquisition of the flailing Snapple from Quaker Oats for $300 million in 1997. In 3 years time, Peltz worked his magic and sold it to Cadbury’s Schweppes for almost $1.45 billion. This deal was also referenced to be one of the most popular of the decade and was also featured as a case study at Harvard Business School.
The primary driver behind Peltz’s investment rationale is to achieve value in the operations stage of the business, which is where the end consumer is actually involved.
Peltz believes that companies cannot be successful unless consumers are fully satisfied, or unless they find value in the products of other competitors. Unlike many investors, who force the management to leverage their company in the hopes of making fast money, Peltz emphasizes on building business operations so that the maximum benefits accrue to shareholders.
The typical characteristics of his targets include popular brands, particularly in the food sector, that are suffering from lack of excitement in the market, and thus his main aim is to get the public talking about those brands again. With his success with Snapple, the beverage brand that is now parent to the ever popular Dr. Pepper drink and the signature Snapple, Peltz has worked with Wendy’s and Heinz, and almost averted disaster by avoiding investment in the doughnut chain, Krispy Kreme.
Nelson Peltz studies the product and the brand up close and gets personal. For example, with Heinz, he was known to have been a vocal advocate against Heinz’s hard to open ketchup packets. Similarly, when Peltz and May were interested in investing in Krispy Kreme, the partners flew to various locations in the country to interview franchise owners.
While their trip involved devouring lots of doughnuts, their findings concluded with a no-buy because of the strategy of the parent company. The franchises they had visited were devoid of customers and upon further inspection they found out, Krispy Kreme was recording profits by pushing additional franchises and collecting fees.
This highlighted a significant problem for Krispy Kreme, which was not emphasizing on sales of the end product, which itself would push the sale of franchises. This strategy was also in stark contrast to that employed by Peltz.
Peltz’s goal to build the brand for long-term success, is demonstrated by his work at Heinz, when he started as a member of the Board. Since Trian Group was initiated in 2005 by Peltz and company, they have remained vested in Heinz, but continued to grow their holdings through their alternative investment company, Trian Fund Management.
Before getting on the Board, Peltz was only an investor in the ketchup company, he had several disagreements with the management that was running the business. He constantly pressed the company to expand their advertising budget to build brand value and recognition in the eyes of the consumer.
One of the first moves taken under his command was to reduce overhead costs. Overhead can make or break a company and is highly crucial; enough for owners and the management to keep a pulse on things on a daily basis. This is not to say Heinz is a small company, but just to point out the fact that costs need to be monitored for every company.
On a similar note, Peltz sent his employees to interview store managers and customers at retail chains and found that Heinz was pushing huge discounts to retailers in return for attractive retail space. In his eyes and as was subsequently proved, the problem was with the advertising Heinz was not undertaking.
Prior to joining the Board of Directors at Heinz, Peltz had pushed the CEO of Heinz, William Johnson, to increase the products’ advertising budget. The advice fell on deaf ears until Peltz joined the Board. From there on he convinced other Board members that brand loyalty would come only through marketing campaigns, as a result of which, customers would eventually be willing to pay a premium for the product.
After a $300 million increase in the advertising budget that brought top slots in print and media alike, the per share value of Heinz grew by over 30 percent and increased shareholder capitalization by $4 billion.
But Peltz also engages in short-term activist trades to unlock value. For example, this year Peltz has been pushing E.I. DuPont de Nemours to break itself up. Peltz believes that DuPont’s conglomerate structure is destroying value. The hedge fund sees a simple solution to all of these problems: a break-up. The two separate businesses would then be able to concentrate on their own separate objectives, or fast vs slow growth. The growth side of business should consist of DuPont’s agriculture, nutrition and health and industrial biosciences segments. While the low growth, cyclical side of the business will consist of DuPont’s performance materials, safety and protection and electronics and communications segments.
As a rule, Peltz and company do not get involved with more than a few companies at time. This is to ensure that managers are attuned with every aspect of the business they are investing in, from operations, to sales and financial details.
They also do not subscribe to the notion of actively re-balancing their portfolio, not just because it is costly to do so, but value investing involves long term views that require perseverance. One will find that most of the successful portfolios and funds are also passively managed.
Trian Fund Management
Trian Fund Management, L. P. is run mainly by Nelson Peltz and his son-in-law. The primary strategy employed by Peltz is value investing in publicly traded shares.
However, a key point that differentiates Trian Fund from other hedge funds is that Peltz likes to get his hands dirty and involves himself deeply with the companies he is working with.
He normally passes on advice to the management on how to improve operations and other aspects of the business. He might advise on mergers and acquisition opportunities, or try to put himself on the Board, however this is not to emphasize that he is imposing. For example, in 2011 when Trian Fund invested heavily in Family Dollar Stores, Peltz believed that privatizing the company would be far more profitable. However, the management thought otherwise and rejected the decision and that was the end of the story.
From Trian’s website:
Trian’s strategy involves investing in public companies with attractive business models that Trian believes trade significantly below intrinsic value due to operating underperformance. Trian believes that its core competency is its ability to optimize the profitability of the companies in which it invests by working constructively with management and the board of directors to execute Trian’s operational and strategic initiatives designed to increase the company’s overall value. This operations-centric investment strategy has been deployed by the Firm’s Principals over a variety of market cycles for nearly four decades.
Trian’s Principals have a long track record of implementing operational improvements through the exercise of influence at a company, often as a result of becoming one of its largest shareholders. Trian believes that its “reputational capital,” achieved by successfully building and improving companies, has translated into strong and established credibility with large, institutional public equity investors who generally support Trian’s operational and strategic initiatives. These relationships are an important component of Trian’s ability to operate with influence without necessarily having control.
As of January 1 2014, Trian’s assets under management reached a peak of $8.5 billion, up 70% from the value of assets under management reported at the end of 2012. From November 2005, through to November 2013, Trian Partners reported an annualized return of 9.1%, compared with 7.4% for the S&P 500 over the same period.
Trian Fund Management, L.P. fact sheet.
Third Point LLC’s top ten holdings as of September 2014:
- PepsiCo, Inc. (NYSE:PEP)
- Mondelez International Inc (NASDAQ:MDLZ)
- Bank of New York Mellon Corp (NYSE:BK)
- Ingersoll-Rand PLC (NYSE:IR)
- Legg Mason Inc (NYSE:LM)
- Family Dollar Stores, Inc. (NYSE:FDO)
- Wendys Co (NASDAQ:WEN)
- E I Du Pont De Nemours And Co (NYSE:DD)
- Lazard Ltd (NYSE:LAZ)
- Tiffany & Co. (NYSE:TIF)
(Note form 13F-HR does not include cash balances.)
Current holdings according to Insider Monkey.
“Diversification is for people who don’t have conviction.”
“If you find a dollar on the balance sheet, it’s worth a dollar… But if you find a dollar on the income statement, it’s worth ten, fifteen, twenty dollars…”
“What we live and breathe is on the income statement.”
“We try to find is a business, a good business… that is just not living up to it’s potential.”
“What’s on the balance sheet is not what’s important, it’s the value of the brand.”
“[On Krispy Kreme] We ate a lot of doughnuts, and saw that the stores were half empty.”
- Nelson Peltz: Diversification is for sissies
- How a Juicy Brand Came Back to Life
- Wendy’s Says Nelson Peltz Gave ‘Ultimatum‘
- Top Triarc Executives Halt Bid for Company
- Peltz Has His Slice of Kraft – Now what?
- 2 Top Executives of Triarc Seek to Take the Company Private
- Nelson Peltz resigns as CEO and chairman of Triarc
- Peltz Is Seen With 2 Seats at Heinz
- Wendy’s Bows to Nelson Peltz, May Sell Baja Fresh
- Trian’s Nelson Peltz Receives Clearance To Buy More Marsh & McLennan
- Heinz Shareholders Elect Peltz, Weinstein to Board
- Trian’s Nelson Peltz on Activist Investing, Mondel?z, and the Economy
- Peltz Blasts PepsiCo Rejection of Split in Letter
- Chicago Tribune Nelson Peltz news archive
- Activist Shareholder Nelson Peltz Urges PepsiCo To Spin Off Pepsi, Buy Oreo-Maker
- CNBC Exclusive: CNBC’s Andrew Ross Sorkin Interviews Nelson Peltz & Ken Moelis from CNBC’s Institutional Investor
- Nelson Peltz Says Heinz CEO Bill Johnson is Likely to Stay
- CNBC Exclusive: CNBC’s Andrew Ross Sorkin Interviews Nelson Peltz & Ken Moelis from CNBC’s Institutional Investor Delivering Alpha Conference Today
- Nelson Peltz: Let me tell you about DuPont
- Nelson Peltz at Harvard Business School
- Nelson Peltz: Wants Pepsi to buy Mondelez
- Nelson Peltz Full Interview on Pepsi, DuPont