What exactly could shareholders of Procter and Gamble (PG) be in for with an investment from Bill Ackman? The founder and Chief Executive Officer of Pershing Square Capital has taken an ownership stake in Procter and Gamble. The new investment is the largest in Pershing Square's history. Ackman's investment vehicle is now a 1% owner of Procter and Gamble shares.
So what's the big deal with Ackman owning a 1% stake, after all, Berkshire Hathaway (BRK.A) owns over 2% of outstanding shares. Well, for those familiar with Ackman they will remember that he is a huge activist and believes in breaking up companies to unlock value. Most recently, Ackman has led the split of Fortune Brands, which resulted in Jim Beam (BEAM) and Fortune Brands Home & Security (FBHS). He has also led the future split up of Kraft Foods (KFT). Ackman was also responsible for Wendy's (WEN) spinning off Tim Horton (THI). Of course, just like any other investor, Ackman has had failures recently with Target (TGT) and JCPenney (JCP).
Ackman likely has two objectives by taking such a large stake in Procter and Gamble: split up the company, or oust several members of the Board of Directors, including CEO Bob McDonald. A potential split up would also see Procter and Gamble selling off some brands as well. Here's how I see a split up working out:
· Beauty & Grooming Company - Includes brands like: CoverGirl, Fusion, Head & Shoulders, Old Spice, Tampax, Always, Crest, Gillette, Herbal Essences, Nice 'n Easy, Oral B, Scope, Pantene, Venus, Braun, Clairol, Olay, Secret, and Vidal Sassoon
· Household Care - Includes brands like: Ace, Bounty, Febreeze, Luvs, Puffs, Cascade, Duracell, Gain, Mr. Clean, Swiffer, Charmin, Dawn, Era, Pampers, Tide, Bounce, and Downy
· Sell Iams pet food segment. The company was bought in 1999 by Procter & Gamble and is now one of the top three pet food companies in the world. A sale could happen to Purina owner Nestle (NSRGY.PK), although that would create a huge monopoly. Smaller pet food companies Pedigree (Mars), Hills (Colgate Palmolive), and Kibbles N Bits (Del Monte) would be better fits for the brand. Although, I could also see private equity scooping in and picking up the brand, as it generates a large amount of cash and is a product needed by consumers.
· Sell OTC drugs business, which includes brands like Prilosec, Vicks, Pepto Bismol, and Metamucil. There are many buyers here from private equity, major drug companies, and smaller OTC companies like Prestige Brands.
In the past several years, Procter & Gamble sold off its Pringles brand to Kelloggs (K) for $2.7 billion. The chip company was formerly a part of P&G's Snacks & Pet Care division, which has been dissolved into the Household Care. Folgers, a former member of the Snacks & Pet Care was sold to Smuckers (SJM) a few years back as well. Another former 2011 division was Health Care, which was broken up with the sale of the company's prescription drug business. In 2011, the company's operating segment looked like with 2011 % of sales:
· Beauty -24%
· Grooming - 9%
· Health Care - 14%
· Snacks & Pet Care - 4%
· Fabric Care & Home Care - 30%
· Baby Care & Family Home Care - 19%
The company's main products fit nicely into the Beauty & Grooming and Household Care segments. The company could keep its OTC business or Iams, but I think it makes more sense to sell them or spin them off as well. Of course another option would be to spin off Gillette, the former public company. Procter & Gamble has sold off assets that didn't fit before including: Aleve, Clearasil, Crisco, Hawaiian Punch, Jif, Noxzema, and Sunny Delight.
Time will tell if Warren Buffett agrees with Bill Ackman's moves in Procter & Gamble. Buffett backed Ackman's involvement in Kraft and agreed with splitting up the company to unlock assets. To get any move passed, Ackman will need people to back him, including major mutual fund holders Vanguard and State Street.
Analysts on Yahoo Finance are calling for earnings per share of $3.81 this fiscal year. With shares trading at $64.39, this represents a price to earnings ratio of 17. Could spinning off assets carry higher price to earnings ratios for the company? Rival companies Unilever (UL) and Colgate-Palmolive (CL) trade at price to earnings ratios of 15 and 20, respectively.
I think some of the excitement has died off with Procter & Gamble's Board of Directors backing CEO Bob McDonald. Even with keeping McDonald, there is a lot of future value for shareholders through sales and spin-offs. Of course, with Ackman's small ownership stake, deals are not guaranteed. I think shares are slightly undervalued at these levels. Shareholders may have to be patient as any move could be a year in the making.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PG over the next 72 hours.