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P&G faces upheaval in uncertain times for consumer companies


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A Corporation Clearly Pinpoints Activist Investor Activity

P&G faces upheaval in uncertain times for consumer companies

The presence of a renowned activist investor and a fertile environment for mergers and acquisitions in the U.S. has raised the possibility of a breakup of Procter & Gamble Co., according to a number of industry sources.

Trian Fund Management, the investor known for waging aggressive — though not always successful — campaigns against the likes of Mondelez International and PepsiCo Inc., disclosed a stake in P&G worth $3.5 billion in February. Recent stock market filings show the fund, which was co-founded by Nelson Peltz, has continued to add to its position in the maker of Pampers diapers and Tide washing detergent.

Peltz has not revealed the reason behind the buying spree, which began toward the end of 2016. Yet the activist's presence in P&G underlines the rapid changes affecting the packaged-goods industry, sector analysts say. Driven by a desire to improve profitability by stripping costs and selling underperforming brands, activist investors and highly leveraged buyers such as Kraft Heinz Co. have caused upheaval at even the most established companies. That includes P&G, which first listed on the New York Stock Exchange in 1891 and now has a market value of about $225 billion.

"The probability of a breakup [of P&G] has clearly gone up," said Ali Dibadj, an analyst at Bernstein Research, in a note published Feb. 15 — the day Trian's stake was disclosed.

Stocks in U.S.-listed consumer products makers were the most popular buys for hedge funds in the first quarter of 2017, according to data compiled by S&P Global Market Intelligence. Funds snapped up $2.7 billion worth of P&G alone, making it the biggest single buy.

The Cincinnati-based company has struggled for growth in recent years amid a slowdown in many of its key markets and increased competition from millennial-friendly internet startups such as Dollar Shave Club, which competes directly with Gillette and is now owned by Unilever PLC. In its most recent fiscal year, P&G's sales declined by 8% to $65.3 billion, although its profitability rose. Some analysts have suggested that P&G should be broken up into several smaller companies — including home care, personal care and healthcare.

P&G has already made strides to improve its performance. In 2014, former CEO A.G. Lafley said the company would sell more than half of its brands in an attempt to speed up growth. Since then, P&G has sold its pet food business to Mars Inc for $2.9 billion and its portfolio of beauty brands to Coty Inc. for $12.5 billion.

However, in the three years since Lafley's announcement, P&G's shares have risen just 9%, well below the gains made during the same period by the S&P 500 and the S&P 500 Consumer Staples Index.

"If P&G can't demonstrate that they can steer this big boat after divesting all of these product lines they are a potential target for splitting up," said Diane Shand, a primary credit analyst at S&P Global Ratings, in an interview with S&P Global Market Intelligence. If it does break up, or continues to sell big brands, the company risks a downgrade to its credit rating, Shand added. The current rating of AA- is "predicated on the company remaining as it is," she said. "The rating would be in jeopardy if they start selling off more assets." S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.

"We have a very appropriate and aggressive cost-saving program underway that is in the best interest of our shareholders," a P&G spokesman told S&P Global Market Intelligence. He added that the company welcomed the investment from Trian. A spokeswoman for Trian declined to comment.

There is no guarantee that Peltz will be able to force any sort of change at P&G. His attempts to break up PepsiCo by merging its snacks business, Frito-Lay, with Mondelez, were fought off by the company's board. Peltz was also defeated in 2015 in attempts to get Trian representatives on to the board of chemicals giant E.I. du Pont de Nemours & Co. Other campaigns at Kraft, Mondelez and fast-food chain Wendy's, have been far more successful.

"We wouldn't be surprised to learn that [Trian] believes P&G isn't moving fast enough, which would make this investment reminiscent of Family Dollar," wrote Barclays analyst Lauren Lieberman in a report published May 24, referring to a previous activist campaign led by Peltz. In that instance, Trian became the second-largest shareholder in discount retailer Family Dollar, gained a seat on the board and agitated for the company to speed up its turnaround plan. In 2015, Family Dollar merged with rival Dollar Tree Inc.

A deal to merge P&G with a rival would have to be the biggest of all time — and is seen as extremely unlikely by most analysts. But if the company chose to sell off more of its brands, there would be no shortage of buyers. Deals in the consumer and retail sector were worth $469 billion last year, the highest level since 2008, according to a report by the consultancy ATKearney. Only 1% of retail company executives think M&A activity will be lower this year, the report added.

Still, megadeals among consumer goods companies are not out of the question. Beer giant Anheuser-Busch InBev bought rival SABMiller for £103 billion last year. In February, Kraft Heinz attempted to buy Unilever for $143 billion.

"Nobody ever had Unilever on the radar," said Shand from S&P Global Ratings.