The reinvention of Nelson Peltz (cont.)

By Shawn Tully, Fortune editor-at-large

Investment choices

At Triarc's and Trian's shared offices on Park Avenue in midtown Manhattan, Peltz and May regularly gather with a team of 15 analysts, accountants and former investment bankers to scrutinize the performance of current holdings and search for new opportunities. Peltz and May always occupy the same seats at one end of an oval, leather-inlaid table in a room decorated with architectural drawings of the Paris Bourse.

Both men believe in constantly assessing their properties' strengths and weaknesses against the best performers in their industries. Their lieutenants prepare detailed comparisons on margins, the percentage of sales spent on marketing, "deals and allowances" paid to retailers, and growth in overhead vs. sales. Peltz prides himself on knowing businesses so intimately, from factory floor to supermarket shelf, that he can systematically break down any management's rationale for mediocre results.

When it comes to potential targets, Peltz and May favor companies with strong brands that aren't basket cases but have been drifting sideways, la Heinz and Tiffany. They worship free cash flow, and believe it's more efficient to revitalize a great brand than to try to build one from scratch. "If you can get a brand growing again, free cash flow grows dramatically," says May. "And then the stock is rewarded with a higher multiple."

While they share the same philosophy and relentless drive, Peltz and May, 64, have different specialties. May, a courtly former accountant and University of Chicago MBA, is an expert on operations. He's more likely to focus on inventory turns than Peltz.

By contrast, Peltz is an intuitive, natural dealmaker. He concentrates on the big picture. "Give me a few facts about a fast-food company," he says, "and I'll tell you what Ebida should be. Like Carnac!" He also loves exploring what grabs the public taste. "I try to figure out the marketing puzzle," he says. He's a one-man market research lab, haunting fast-food restaurants to try the latest burgers, sodas - and ketchup packets.

Their penchant for on-the-ground digging helps Peltz and May avoid costly mistakes. A case in point was their brush with Krispy Kreme (Charts). In 2004 they pondered buying a big chunk of the doughnut chain. "But I couldn't make heads or tails out of their financial statements or what they were telling investors," says Peltz. So he and his team got on Peltz's Boeing 727 to visit stores and talk to franchisees in Toronto, Las Vegas, Los Angeles and other cities.

"We ate a lot of doughnuts," recalls Peltz, "and saw that the stores were half empty." Yet the franchisees complained that the company was pushing them to build more stores. "We figured out that the company was making most of its money selling the franchisees equipment, not on doughnuts," says Peltz. "The company wasn't giving the facts to shareholders." Stuffed with cinnamon twists and information, Peltz passed on Krispy Kreme, avoiding the subsequent meltdown in its stock.

Peltz commutes to Manhattan from High Winds, the 130-acre former home of Reader's Digest co-founder DeWitt Wallace in Bedford, N.Y. The property features a 27-room mansion, a huge lake, a waterfall and a professional-quality indoor hockey rink with a Zamboni machine. A flock of albino peacocks roams the manicured grounds.

In Palm Beach, his French Regency - style home covers 44,000 square feet. Built in 1965, it boasts a foundation lined with lead to keep out moisture from the ocean. After Peltz bought the lot across the street to build a tennis court, he learned that he couldn't install one without a residence. So he added a second mansion for guests, complete with orchid house.

One of his Florida buddies is golfer and sports entrepreneur Greg Norman, a close friend whom Peltz unsuccessfully proposed for the Heinz board. Norman, who takes Peltz on fishing trips at his Colorado ranch, calls Peltz "a mental marathon runner." He adds, "Nelson isn't a Harvard type. He's street smart. He understands what the masses want."

For all his love of opulence, Peltz spends most winter weekends ferrying his kids to drafty hockey rinks all over the Northeast. His ten children range in ages from 41 to 4. He has eight with his third wife, Claudia, a former fashion model. He's raised a brood of figure skaters and high school hockey stars. For Peltz, the hockey life is ideal discipline.

"My kids are exhausted every day, and I keep them that way," he says. "It's gym, ice, homework. They're too tired to get in trouble." He also says that he tries to set an example: "I don't want them to see me walking off with a bag of golf clubs over my shoulder. If they see me work hard, it's better than a lecture." He's right at ringside to make sure all eyes are on the puck, boasting that he's scurried to as many as four hockey games on a single day.

After dropping out of the University of Pennsylvania's Wharton School in 1962, Peltz (who still has only a high school diploma) built his family's tiny frozen food business in Brooklyn into the largest distributor in the Northeast. Starting in 1985, he marshaled more than $1 billion in junk bond debt, courtesy of Milken, to assemble the biggest packaging company in the world, Triangle Industries, by gobbling up National Can and American Can, among other prey.

When Peltz and May sold Triangle to France's Pechiney in 1989, their gains amounted to around $840 million, and shareholders made eight times their investment. His best-known triumph was Snapple. In the late 1990s he bought the flagging iced-tea brand from Quaker Oats for $300 million, brilliantly revived its blithe, quirky appeal, and resold it three years later for more than $1 billion, capping one of the most spectacular deals of the decade.