Procter & Gamble has another activist in its investor base, but Wall Street analysts aren’t sold that it’s time for big changes at the consumer products giant.
Nelson Peltz’s Trian, which has agitated for change at PepsiCo and others, acquired 6.4 million P&G shares as of the end of last year, according to regulatory filings. That stake was worth $584.7 million as the firm’s stock gained 3.7 percent to $91.12 Wednesday. Some reports suggest Peltz now has a total stake worth $3.5 billion.
P&G has been here before. Activist William Ackman pushed for change at the company, criticizing chief executive officer Bob McDonald, who later left the firm in 2013.
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“The best way for [P&G] to prove its competence is to grow the business, not rip out more costs or introduce further financial engineering,” said Bill Schmitz, research analyst for Deutsche Bank. “Remember, the company is on its second $10 million productivity program in less than a decade and cost structure is no longer the problem it once was.”
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P&G has scaled down in the past few years, divesting divisions like Duracell, which went to Warren Buffett’s Berkshire Hathaway for $1.8 billion, and its Specialty Beauty Business, which went to Coty Inc. for $11.6 billion (P&G still owns some beauty brands, including Olay, SK-II and Pantene). The idea is that with 10 core businesses and 65 brands, P&G should be able to accelerate growth.
“For some, the answer is smaller, more nimble and accountable bite-size pieces, which would seem logical on paper,” Schmitz said. “However, three $20 billion-[plus] sales businesses are no more agile than one $70 billion business, and given the shared services infrastructure and other global functions, the dis-synergies associated from any split would far surpass any benefit.”
Barclays analyst Lauren Lieberman seemed to agree that a break-up may not be the way to go.
“P&G is not PepsiCo or Kraft,” she said. “As we see it, there are no logical break-up scenarios to be explored as the portfolio clean-up work already completed has resulted in a far smaller and more focused company.”
Linda Bolton Weiser, senior analyst for consumer products at B. Riley & Co., noted that P&G seemed to be defending its choice to remain an integrated household and personal-care company on a recent earnings call.
“[P&G] contends the cost dis-synergies to complete a separation would be massive, with operational dis-synergy that would be extraordinarily complex, especially since [P&G] has started building new multicategory manufacturing sites,” Bolton Weiser said. “The tax implications would likely be very significant, as would capital structure dis-synergies. To overcome these negatives and create more value with separate pieces, [P&G] would have to be comfortable believing in dramatically higher top-line growth rates (more than just 1 or 2 points) over many years. But P&G concluded this topic [on the earnings call] by saying that its view on value creation will continue to be a dynamic one, and it is not wed to the past simply because it is the past. However, it sounded to us like P&G would not be easily convinced to split itself in two.”
In addition to her thoughts on a potential break up, Lieberman seemed to be left wondering why Trian would be making a move at this point in time.
“Our gut reaction to the news was ‘why now’ as we think it’s tough to argue that P&G hasn’t already been proactively addressing many of the areas that would typically be on an activist investor’s ‘hit list,’ including cost-cutting and productivity, portfolio rationalization and cash return to shareholders,” Lieberman said. “Though it may seem naïve, we are more inclined to wonder if Trian simply buy in to the notion that a fundamental turnaround is taking hold at P&G with the added kicker that it could push the company harder on cost-cutting should revenue improvement not transpire as hoped.”