Activist Investor Presses for Changes in Focus and Management at P&G

By Muhammad Bazil - August 1, 2012 | Tickers: CP, CL, JCP, KMB, MCD, PG, TGT | 0 Comments

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Procter & Gamble Company (NYSE: PG) announced at the end of last week that it will purchase the remaining 50% of a joint venture that it operates with the Spanish non-durable consumer goods manufacturer Agrolimen Group (privately held).  PG acquired its first 50% of the enterprise in 1989, when PG and Agrolimen Group entered into the venture. Part of the joint venture, Arbora & Ausonia (A&A), manufactures baby and feminine hygiene products under the Dodot, Kandoo, Charmin, Evax, Asonia, and Tampax brands.  A&A is headquartered in Barcelona and sells almost exclusively in the Spanish and Portuguese markets.  Agrolimen Group first announced its decision to sell its 50% stake in A&A to PG last Friday and stated that it may take as long as the remainder of 2012 for the transaction to be completed.

The announcement comes as no surprise to observers of PG.  The consumer goods giant had stated earlier this year that it intended to change its overall corporate strategy and focus on building market share and revenue in the major markets for its largest, core products.  PG had previously maintained a strategy of focusing on expanding business in new markets.  Market analysts have noted that A&A's baby and hygiene products fit in well with PG and its new strategy.  PG operates six core divisions: Beauty, Grooming, Health Care, Pet Care, Fabric and Home Care, and Baby and Family Care.  PG has not yet stated how A&A will fit into its current corporate structure, and also declined to discuss how it believed the deal would affect future earnings.  PG's next earnings report is scheduled to be released on August 3, 2012. 

PG's reputation among market analysts has been that of a steady, but lackluster underperformer.  PG's purchase of the remaining 50% of A&A appears to be one of the first steps in its effort to implement the new strategy.  The corporate leadership of PG has faced intense pressure from activist investor Bill Ackman to improve company growth, replace CEO Bob McDonald, and make deep cost cuts to improve corporate profit margins.  Ackman has recently acquired a little over 1% of PG's stock, but his influence with the company is—as with other recent acquisitions—far greater than would normally be expected for a stockholder with a holding of that size.  Through his company, Pershing Square Capital Management, LLP (privately held), he has acquired significant stakes in, among others, McDonald's Corporation (NYSE: MCD), J.C. Penney (NYSE: JCP), Target Corporation (NYSE: TGT), and Canadian Pacific Railway (NYSE: CP).  In most cases, Ackman obtains a significant share of stock—as much as 12% of all common stock in the case of CP—then uses his influence to bring about changes in management and actively manage the corporation himself.  Ackman appears to be using this same strategy in his current pursuit of PG. 

PG, however, appears to be resisting Ackman's overtures to some extent.  The PG board stated on July 18^th that it supports CEO Robert McDonald and his plan to bring the company out of the doldrums.  Market analysts have stated that PG has hired consultants to help them "manage" Ackman and the changes in corporate management that they expect he will demand.  The current value of Ackman's holdings in PG is estimated to be approximately $2 billion.

PG's corporate boardroom drama comes at a time when the consumer non-durable products market is looking up.  PG's main competitors in the market, Colgate-Palmolive Co. (NYSE: CL) and Kimberly-Clark, have noted significant recent success.  On July 26^th, CL announced that its quarterly earnings were in line with earlier, higher estimates, and that it expects double-digit growth this year in earnings per share.  CL's products include Speed Stick deodorant and Colgate toothpaste.  On the same day, KMB—whose major brands include Huggies diapers and Kleenex tissues—announced that its quarterly profit exceeded expectations; so much so, in fact, that the company was raising its full-year profit projections. 

In recent years, PG has been flat in its profits and sometimes even sluggish.  I believe that PG's time is now here.  PG has formulated a strategy for growth that puts it on track to re-focus on its core business—its acquisition of A&A being the most recent and visible example of this new focus.  Ackman's new role at PG, his pressure on the company to reduce personnel costs and jettison less profitable divisions, and PG's response all show that the company is no longer just marking time, but taking an active role in bringing back solid, steady growth.  Furthermore, the growth and solid financial performance of PG's main competitors in the non-durable consumer goods market bode well for PG.  I heartily recommend the stock to investors for growth and profitability.

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