Cans of Pepsi are seen at the PepsiCo Walkers factory in Leicester, Britain, August 14, 2024. REUTERS/Hollie Adams/File Photo

By Juveria Tabassum and Abigail Summerville

(Reuters) -Elliott Management on Tuesday disclosed a $4 billion stake in PepsiCo and urged the beverage maker to revive its soda business, boost its share price and become more competitive.

PepsiCo's stock performance has lagged that of its biggest rival, Coca-Cola, over the past five years, as the Quaker Oats maker faces erratic demand in its snacks business and shifts its focus to healthier drinks and sodas.

Elliott's stake represents about 2% of PepsiCo's market value as of Friday close, making it one of the firm's biggest holdings.

The investment firm singled out Pepsico's North America beverages unit as an underperformer, saying growth and margins lagged peers' due to strategic missteps, market-share losses in soda and the introduction of new brands and products that has "strained focus and execution".

The company should also evaluate re-franchising its bottling network along the lines of Coca-Cola's, Elliott said. PepsiCo could sell the rights to distribute its drinks to regional bottlers and keep equity stakes in those franchises, or it could spin off the North American bottling business.

On the food side, Elliott said the company should consider selling non-core assets. Industry sources have long viewed the Quaker Foods business as non-core.

A Piper Sandler analyst report on Tuesday said Post Holdings seems like a "willing buyer" for Pepsi's syrup and mix brands like Aunt Jemima produced by its Pearl Milling unit as well as Quaker based on some category overlap and Post's history of buying brands that may be non-core to other companies.

PepsiCo told Reuters in a statement it would review Elliott's letter "within the context of its strategy" that includes targeted investments in innovation and portfolio transformation.

"For years, the disappointing performance of PepsiCo's beverage business was more than offset by its resilient and high-performing foods business, PepsiCo Foods North America(PFNA). More recently, however, PFNA has begun to falter," Elliott wrote in its letter.

PepsiCo's North America beverages and foods units each contribute 30% of its annual revenue, according to a company filing.

Deepening a push to revive its energy drinks portfolio, the company built a 5% stake in energy drink maker Celsius Holding last week, months after buying prebiotic soda brand Poppi for nearly $2 billion.

PepsiCo stock, which has lost about a quarter of its value since hitting a record high in May 2023, was up about 2% on Tuesday.

"Activists don't think long-term, so Elliott will be focused on quick wins. Investors often welcome the presence of an activist as it provides the impetus for managers to pull up their socks and do something. The jump in the share price is telling," said Dan Coatsworth, investment analyst at AJ Bell.

Branded packaged food companies have struggled with sluggish sales over the past three years due to post-pandemic price hikes to shield their margins from inflation. The industry is now looking to reshape portfolios through splits and mergers to counter shifting consumer demand and high commodity costs stemming from the tariffs on U.S. imports.

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"There are operating efficiencies to be gained by spinning off the bottling business, helping to improve overall profitability, but the company has recently spent significant amounts of capital in its bottling and distribution lines making it difficult to part with," said Brian Mulberry, senior portfolio manager at Zacks Investment Management.

About a decade ago, activist investor Nelson Peltz led an unsuccessful campaign to get Pepsico to split its struggling beverages unit from its stronger snacks business, home to brands such as Lay's and Doritos.

Elliott said the company should "defend its core franchises in carbonated soft drinks with incremental marketing and innovation, while selectively expanding in growing categories".

Analysts have pointed to its lemon-lime soda Starry, launched in 2023, and its at-home sparkling water maker SodaStream, which it bought in 2018, as distractions in the beverage portfolio.

U.S. President Donald Trump's Make America Healthy Again (MAHA) Commission, led by Robert F. Kennedy Jr., is also forcing packaged food companies to ditch dyes and push Americans to eat "whole foods".

PepsiCo said earlier this year it plans to rebrand its Lay's and Tostitos chips brands to highlight the absence of artificial colors or flavors and migrate its entire portfolio to natural colors, or give consumers the option to have a product without a synthetic dye.

(Reporting by Juveria Tabassum in Bengaluru; Additional reporting by Akash Sriram; Editing by Saumyadeb Chakrabarty, Devika Syamnath and Cynthia Osterman)