P&G Seen Mulling Brand Sales for Better Return: Real M&A
Procter & Gamble Co. (PG) would stand to boost the lowest valuations in a decade versus competitors by parting with businesses from batteries to dog food.
The largest consumer-goods company cut its profit forecasts three times in 2012 as sales growth slowed in Europe and North America, limiting the stock’s gain in the last five years to just 2.6 percent, the worst performance among its household products rivals. Compared with Colgate-Palmolive Co., investors this month were willing to pay the least per dollar of profit to own P&G shares in 10 years, and the Cincinnati-based company’s price-earnings ratio fell below Kimberly-Clark Corp. (KMB)’s for the first time since 2001, according to data compiled by Bloomberg.
After William Ackman disclosed a stake in P&G that’s his largest initial investment ever, the $178 billion company is seeking to hire advisers amid calls to jettison executives or assets, people familiar with the matter said. Divesting brands such as Iams, Braun, Duracell and Crest could help P&G increase the combined per-share value of its divisions by at least 30 percent to the mid-$80’s, said Huntington Asset Advisors. Sanford C. Bernstein & Co. says that while sales of units from pet care to consumer tissue should be weighed, a full breakup could value P&G’s pieces at as much as $200 billion.
“P&G’s stock has been stuck here forever,” Peter Sorrentino, a senior fund manager at Huntington in Cincinnati, said in a telephone interview. “There’s just no real genesis of growth. There’s an awful lot of potential in there that could be unlocked with the right kind of restructuring.”
Huntington oversees $14.7 billion, and P&G is one of its largest holdings, Sorrentino said.
“We do not comment on future plans in respect of acquisitions or divestitures,” Paul Fox, a spokesman for P&G, said in an e-mail. “We are focused on growth through our top 40 businesses, top 20 innovations, top 10 developing markets and our $10 billion productivity program.”
P&G, which counts Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) as its third-largest shareholder, markets its products in more than 180 countries and has more than 75 brands including Tide, Gillette and Pampers.
The company was forced to trim its profit forecasts this year because of slowing sales growth in Europe and the U.S., rising commodity costs, unfavorable foreign-exchange rates and price reductions to better compete. Analysts now project net income of $10.8 billion for the year that ended in June, which would be the third-straight decline in annual profit, according to data and estimates compiled by Bloomberg.
Since activist investor Ackman disclosed on July 12 that his Pershing Square Capital Management LP had taken a stake in P&G, the stock had risen 5.6 percent through yesterday. Ackman, 46, plans to press for management changes and is seeking more investors to join his push, people familiar with the situation said last week.
P&G needs “an activist to shake things up and effect change, so this could be just what the doctor ordered,” Todd Lowenstein, a Los Angeles-based fund manager at Highmark Capital Management Inc., which oversees about $17 billion, wrote in an e-mail.
Ackman didn’t respond to a request for comment left with a spokeswoman for his New York-based firm.
Even with the recent increase, shares of P&G have fallen 2.9 percent this year and have only added 2.6 percent since July 2007. P&G’s five-year performance has trailed each of its main competitors -- Unilever (UNA), Clorox Co. (CLX), Reckitt Benckiser Group Plc (RB/), Kimberly-Clark, Henkel AG, Colgate (CL) and Church & Dwight (CHD) Co., data compiled by Bloomberg show.
Rivals’ gains have ranged from 12 percent at Unilever, based on the Amsterdam-listed shares for the London- and Rotterdam-based seller of Dove soaps, to 133 percent at Princeton, New Jersey-based Church & Dwight, which makes Arm & Hammer baking soda.
“It’s obvious they have underperformed and business has been a little softer in terms of what you’d expect,” John San Marco, an analyst at Philadelphia-based Janney Montgomery Scott LLC, said in a phone interview. “For the better part of the decade, the better performers in this industry have been those portfolios with more focus like Colgate and Church & Dwight.”
New York-based Colgate, the world’s largest toothpaste maker, has climbed 53 percent in five years, giving the company a price-earnings ratio of almost 21. P&G traded yesterday at 17.3 times profit. This month, Colgate’s multiple was as much as 26 percent higher than P&G’s, the widest gap since December 2001, data compiled by Bloomberg show. In the last month, investors have also been willing to pay the biggest premium for Unilever’s earnings relative to P&G since June 2010.
Last month, P&G’s earnings multiple fell to less than that of Kimberly-Clark, the maker of Huggies diapers and Kleenex tissues, for the first time since April 2001, the data show. After the news of Ackman’s investment, P&G surpassed Dallas- based Kimberly-Clark, which is valued at 17.2 times profit.
Today, P&G shares rose 0.8 percent to $65.35, the highest closing price since April 26.
Some P&G directors are dissatisfied with Chief Executive Officer Robert McDonald, 59, and are discussing a possible leadership change, people familiar with the matter said last week. The company may also hire an external public-relations firm and banks in coming days to help manage Ackman, another person said this week.
“Ackman’s not doing this for his health,” Matt McCormick, a fund manager who helps oversee $6.2 billion including P&G shares at Cincinnati-based Bahl & Gaynor Inc., said in a phone interview. “He recognizes that the parts are worth more than the whole, and he has an expertise at recognizing brands with a lot of worth that in the short term are underperforming and just need a catalyst.”
The Duracell battery and Iams pet-food units are seen inside P&G as businesses where innovation is needed to justify keeping them, people familiar with the matter said this week. Even before Ackman’s purchase, P&G had spoken with advisers to assess interest in those assets, other people familiar with the situation said. Duracell may fetch as much as $4 billion and Iams would probably sell for about $3 billion, one person said.
P&G should sell or spin off Iams, which it acquired in 1999 for $2.3 billion, as well as Braun electric shavers, Duracell and the Crest line of toothbrushes and toothpaste, according to Huntington’s Sorrentino.
That would allow P&G to focus on expanding and reacting to new opportunities in its three main businesses -- beauty products, razors, and detergents and surface cleaners, Sorrentino said. Items in those units benefit from being produced and marketed together, while other brands are too different to create manufacturing efficiencies, he said.
“If you’re in the shampoo business, all you do is put different bottles in the machines, and so those brands all need to stay together,” Sorrentino said. “The toothpaste manufacturing line, you don’t use that for other things. They could cut the rest of the noise out.”
P&G’s beauty unit, which makes everything from Head & Shoulders shampoo to Olay body lotion and Pantene hairspray, accounted for about 24 percent of profit in fiscal 2011, according to the company’s annual filing. Pet care and snacks, which are reported together and include Iams and the Pringles potato chip business that was sold to Kellogg Co. in May, represented just 2 percent of earnings, the filing showed.
Sorrentino estimates P&G’s stock is worth “in the mid $80’s” when he values each of its businesses separately using comparable publicly traded companies. That’s about 30 percent higher than yesterday’s closing price of $64.81.
The divestiture of units including pet care, Duracell, Braun and consumer tissue should be “immediately considered,” Ali Dibadj, a New York-based analyst at Bernstein, wrote in a July 13 report. If P&G can’t unlock its potential, “a more profound break-up of the company may be one viable option by which to facilitate positive change,” said Dibadj.
He estimates the sum of the company’s parts is worth between $180 billion and $200 billion. While that’s at most only 13 percent higher than the company’s market value yesterday, it would create “significant operational and even cost synergies” with “very limited disynergies,” he wrote.
Still, P&G benefits from being a conglomerate because its array of products on retailers’ shelves around the world gives the company more negotiating power, Richard Cook, co-founder of Cook & Bynum Capital Management LLC in Birmingham, Alabama, said in a phone interview.
“We don’t have any sort of anti-conglomerate bias,” said Cook, who oversees $220 million including P&G shares. While there are some benefits to a breakup, “there are disadvantages to being split up also. There’s certainly a tradeoff.”
In February, P&G pledged to cut $10 billion in expenses by 2016. That’s a step in the right direction, said David Katz, who oversees $900 million as chief investment officer at New York- based Matrix Asset Advisors Inc., a P&G shareholder. Instead of breaking itself up, P&G should buy back shares to take advantage of its undervalued stock, Katz said.
Ackman has spurred some breakups and spinoffs that have proven lucrative for shareholders. Fortune Brands Inc. separated in October after Ackman became the largest holder and sought to dismantle it. Of the businesses that remain publicly traded, Fortune Brands Home & Security Inc. (FBHS) has surged 75 percent since then, and Beam Inc. (BEAM) has climbed 47 percent.
Kraft Foods Inc. (KFT), in which Ackman held shares, has risen 15 percent since August when it announced plans to separate the North American grocery unit from its larger snack-foods business.
“P&G used to be one of the great stocks to own,” Laurence Balter, a money manager at Fox Island, Washington-based Oracle Investment Research, said in a phone interview. Asset sales or spinoffs “would possibly be a good way to unlock shareholder value. You can’t turn a $170 billion ship on a dime. P&G needs a kick in the rear.”
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