I'm pretty excited about Bill Ackman's recent investment in Procter & Gamble (PG), because I believe it will lead to improved management. Nonetheless, it's important to be rational about what may and may not happen -- and whether it would be good for investors.
Breaking Up Is Never Fun To Do
One of the most common predictions floating around the Internet in the wake of the announcement is that Procter & Gamble might break up into two or more separate companies, similar to the Kraft/Mondelez split. This would hopefully deal with the problem of P&G's "fat around the middle."
But this is unlikely to happen. Why? Well, first of all, Ackman's stake in P&G is unlikely to be large enough to actually force a breakup. But second, even if he theoretically could, the valuation upside is limited:
[T]he sum of P&G's parts is worth between $175 billion and $208 billion, according to Sanford Bernstein. That's not enough upside for such a wrenching upheaval.
The other requirement for a breakup would be winning the support of other investors. After all, a shareholder vote would be required to approve the breakup -- and I'm not sure many shareholders would go for it. Unless I saw significant upside, I'm not sure I'd want a P&G breakup. Part of my attraction to P&G is based on the mega-cap status. It has stability because of its 26 "billion dollar brands." Splitting up those brands would reduce the security factor, and require me to hold shares in two separate companies to keep that "peace of mind" I can currently have by investing in just one.
The More Likely Solution
Between Ackman's investment and the P&G board expressing dissatisfaction with CEO McDonald, it's somewhat of a given to me that something will be done. Management changes are pretty likely at this point, as are additional streamlining/right-sizing moves by the company.
Another possible outcome is the sale of certain units within P&G that are seen by company insiders as needing improvement:
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. Even before Ackman's purchase, P&G had spoken with advisers to assess interest in those assets, other people familiar with situation said. Duracell may fetch as much as $4 billion and Iams would probably sell for about $3 billion, one person said.
Such a move could be the "best of both worlds." It would allow P&G to focus on core brands, without the headaches of a complete breakup. P&G has already sold off Folgers coffee and Pringles chips, and in addition to Duracell and Iams, Braun is another asset P&G might sell off.
Conclusion
While the recent developments are a strong positive for P&G, it's important for investors not to trade on unsubstantiated rumors like "Procter & Gamble will break up." P&G certainly presents a good value at the current price, but the changes at P&G are likely to happen slowly. Ackman typically takes time to make his moves, so the recent flurry of media and trading activity should cool down. Investors should be ready to wait for several months, or perhaps more, to determine where Procter & Gamble will go from here.
Disclosure: I am long PG.
