Will Procter & Gamble (PG) Stock Get Its Activist Spark?

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Think you know what to expect to see next from Procter & Gamble Co (NYSE:PG) now that activist investor Nelson Peltz has his hands on roughly $3.5 billion worth of PG stock?

Procter & Gamble PG stock

If you’re expecting some pressure on P&G’s management to split the company up as a way of unlocking shareholder value (which is the consensus) you’re probably right.

‘That being said, such a development isn’t a foregone conclusion. Peltz, the chief of investment management outfit Trian Partners, has just as much of a history of focusing on solving execution problems — and even spurring acquisitions — as he does splitting up companies.

The question is, what does Procter & Gamble need most?

PG Stock Is an Easy Activist Target

The purchase was hinted at in December, though unnamed at the time. In the meantime it’s been confirmed Peltz was talking about what would eventually be 6.4 million shares of PG stock.

The general consensus is that Peltz intends to start improving the company’s profitability from the inside, cutting costs and overhauling operations. More than just a few observers, however, suspect that is only a precursor to breaking the company up into more focused parts.

And it’s not as if the company couldn’t use the help.

The consumer products name behind brands such as Pampers diapers, Ivory soap and Downy detergent was once a competitor nobody wanted to face, and an investment everybody wanted to own. Time, size, and complexity have taken a toll on P&G. Revenue has been dwindling for a couple of years now, and while income has held steady, investors had good reason to expect growth.

To its credit, Procter & Gamble has been streamlining itself, recently selling a wide swath of its beauty brands to Coty Inc (NYSE:COTY) — $11.3 billion worth of beauty brands, to be precise. After a little more than a year on the job though, CEO David Taylor was expected by shareholders to show actual proof of life, rather than just shrinking the company towards success. Its brand names — and the Procter & Gamble name itself — are too valuable to let languish.

Enter Nelson Peltz

To figure out how the activist investor intends to handle a new project, one only has to look at his previous activist efforts. Unfortunately, Peltz has widely varied repertoire.

Take Peltz’s interest in Heinz, for instance. Back in 2006 — well before it merged with Kraft to become Kraft Heinz Co (NASDAQ:KHC) — Peltz took an interest and a controlling position in the venerable pickle and ketchup manufacturer, partly to encourage the spinoff of weaker, distracting divisions, but mostly to cut costs the company’s management seemed unwilling or unable to make. It was that newly created value that got Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) and 3G Capital interested in buying Heinz in 2013, ultimately setting up the pairing with Kraft.

However, Peltz’s $2.5 billion stake in General Electric Company (NYSE:GE), taken in 2015, was almost an entirely passive one. CEO Jeff Immelt was already streamlining the company and Peltz felt the market was undervaluing where GE was going. Peltz was just along for the ride, mostly leaving the company alone.

Still, Trian Capital’s reputation as an activist stakeholder is well-deserved, as Peltz has in the past prioritized divestitures and acquisitions that management teams haven’t wanted.

Case in point: In 2013, Peltz was pushing PepsiCo, Inc. (NYSE:PEP) to acquire snack foods maker Mondelez International Inc (NASDAQ:MDLZ), an outcome that surprisingly didn’t materialize, considering he was a major shareholder in both companies. Once Peltz gave up on the idea of the marriage, he began to push for the spinoff of PepsiCo’s snack food division. It would have been a very close “next best thing” to a union of Mondelez and PepsiCo.

Cost cuts were also always part of the discussions between Peltz and PepsiCo, but never really the priority.

Bottom Line for PG Stock

The question is: which of those three previous situations does Procter & Gamble most resemble now? Is the consumer staples giant too big and too disparate for its own good and would be better off splitting itself up, or is the organization just bloated, with too many overlapping parts, each incurring unnecessary expenses?

Most long-term owners of PG stock likely see the organization’s challenges aren’t rooted in too much diversity, but rather, in years of sloppy integration of a variety of business lines. Indeed, with the bulk of its brands all readily available in grocery stores, the opportunities for synergies as well as cross-marketing are terrific; marketing is largely the same sort of shtick for each of its product lines.

At the same time, there’s little assurance that any divestiture would command an attractive price in the open market even if P&G and Peltz did want to spin off some units.

That’s arguably okay with Peltz, who is more of an operational activist than one who simply “unlocks value” by breaking companies apart. In other words, he’s playing the long game here and that’s a good thing for loyal shareholders. Current and prospective owners of PG stock have been waiting too long for this ride to get underway.

Of course, if that effort doesn’t get traction, Peltz isn’t afraid to press for spinoffs, either.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/will-procter-and-gamble-pg-stock-nelson-peltz/.

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