High-profile activist investor William Ackman has built a $5.5 billion stake in Mondelez International Inc., a giant bet that the maker of Oreo cookies and Ritz crackers will become the biggest target in a wave of consolidation reshaping the food industry.
Mr. Ackman’s Pershing Square Capital Management LP revealed its stake, which amounts to about 7.5% including options and forward contracts, in a statement late Wednesday night. The activist believes Mondelez has to grow revenues faster and cut costs significantly, or sell itself to a rival, according to people familiar with the matter.
With a $75.6 billion market value, there are few companies that could afford Mondelez. One potential buyer, the people said, could be the newly formed Kraft Heinz Co., which has a $97.6 billion market cap. A spokesman for Kraft Heinz declined to comment.
“We welcome Pershing Square as investors in our company,” a Mondelez spokeswoman said. “We’ll continue to focus on executing our strategy and on delivering value for all our shareholders.”
The investment, one of the biggest ever by an activist, represents the latest in an array of dizzying turns for the snacks company, whose $34 billion in annual sales makes it one of the world’s biggest packaged-food producers. In 2012, Mondelez spun off its former North American grocery brands business into Kraft Foods Group Inc., which itself was gobbled up this year to form Kraft Heinz.
Were a sale to materialize, it would be one of the biggest in a string of mergers in the food industry in the past two years that also has included Tyson Foods Inc.’s $7.7 billion acquisition of Hillshire Brands Co.
The drive to consolidate big U.S. food companies comes as they wrestle with rapid shifts in consumer tastes that are hampering sales growth. Shoppers increasingly are shunning traditional packaged foods in favor of products that are fresher and claim simpler, more natural ingredients.
A sale to Kraft Heinz would recombine Mondelez and its former Kraft unit in a remarkable circle of corporate rearrangement. It would reinforce the influence in the industry of private-equity firm 3G Capital Partners LP, which acquired control of Heinz in 2013 and was the architect of the Kraft-Heinz merger that closed last month. 3G also bought Burger King in 2010 and last year merged it with Canada’s Tim Hortons. Mr. Ackman personally invests in 3G funds, but he hasn’t discussed the Mondelez investment with 3G, the people said.
Mr. Ackman’s arrival in Mondelez squeezes the food company between two of the heaviest hitters in the field, his Pershing Square LP and Trian Fund Management LP, co-founded by Nelson Peltz.
Mr. Peltz has a long history with Mondelez Chief Executive Irene Rosenfeld, having pressed for the Kraft-Mondelez split. Mr. Peltz became a Mondelez director in January 2014 as part of a truce after another public campaign, this time for it to cut costs and merge with PepsiCo Inc.’s snacks business. When he joined the board, Mr. Peltz dropped the merger push, which both Mondelez and PepsiCo had rebuffed.
Mr. Ackman has similar ideas for the Deerfield, Ill.-based snack giant and believes that Mondelez has dominating brands in the high-margin snack business, the people familiar with his investment said. The two activists haven’t spoken about Mondelez, the people said.
“I think Bill is very bright and he recognizes value when he sees it,” Mr. Peltz said Wednesday.
PepsiCo, whose food business includes Frito Lay and Quaker Foods, is another potential buyer of Mondelez, according to people familiar with the matter. A spokesman for PepsiCo declined to comment.
While a tie-up with Kraft Heinz could be seen as an about-face for Mondelez, the theory is that Kraft’s new management, 3G, brings a more aggressive focus on costs.
Cutting costs is considered 3G’s specialty, and it has put pressure on the rest of the food industry, including Mondelez. Analysts have speculated it would try to roll up more food companies. Bernstein analyst Alexia Howard wrote in a research note last week that one possible scenario is for Kraft Heinz to acquire General Mills Inc. first, then Mondelez.
The Brazilian private-equity fund has been joined by veteran investor Warren Buffett on deals including the Heinz buyout and the Burger King-Tim Hortons merger. Mr. Ackman’s Pershing Square owns a large stake in the company created by Burger King-Tim Hortons.
Mr. Peltz has already been pushing aggressive cost cuts at Mondelez. A month after he joined the board, it said it had adopted a cost-cutting tool favored by 3G known as zero-based budgeting, which requires managers to justify all costs every year instead of working off the prior year’s spending. Mondelez also has closed underused factories and invested in new, more efficient ones aimed at lowering future costs.
Though Mondelez continues to get hit by external factors like the stronger U.S. dollar, cost cuts and an ability to raise prices for its products overseas enabled its adjusted operating margin to expand by 2.7 percentage points in the latest quarter, topping expectations. Its shares have risen 27% this year, far outpacing major indexes and most rivals. The stock is up 65% since the Kraft split.
Activists, who buy shares and push for changes they believe will boost the stock price such as breakups, buybacks and cost cuts, have gathered larger war chests in recent years on the back of growing successes.
As a result, they’re taking on bigger targets. Trian earlier this year waged an unsuccessful battle for board seats at chemical giant DuPont Co. Jana Partners LLC in April disclosed a more than $2 billion stake in chip maker Qualcomm Inc., which has a market capitalization of more than $100 billion, and in June announced it had taken a 7.2% stake in packaged-foods giant ConAgra Foods Inc. and called for the company to shed its private-label foods business.
Pershing Square and Trian are two of the biggest and best known. Pershing Square now manages over $20 billion and sold $1 billion in bonds this year that was to help with its next big investment, according to filings. Trian, which itself has said it has two new large investments in the works, has roughly $12 billion in investible assets.
Assets of the two firms combined would rival roughly what the entire activism industry managed in 2008, according to industry researcher HFR.
The presence of multiple activists in the same company isn’t uncommon. Last year, Mr. Peltz’s partner, Ed Garden, endured some parallel activism in Family Dollar Stores Inc. from Elliott Management Corp., which questioned the deal reached to sell the company to Dollar Tree Inc., which Mr. Garden helped seal as a Family Dollar director.
By David Benoit, Liz Hoffman and Annie Gasparro