Procter & Gamble Plans to Sell Folgers to Smuckers: Win-Win?

I mentioned Procter & Gamble's (PG) all stock sale of Folgers to Smuckers (SJM) in my bullish case for PG that was posted in July. The deal is expected to close by the end of the year. As the timeline and details of the deal are not easily found online, I thought I'd post a summary:

• All Smuckers shareholders of record as of 9/30/08 will receive a special dividend of $5 per share on 10/31/08. Smuckers shareholders will vote on the deal to merge with Folgers on October 16, 2008.
• If Smuckers shareholders and the Federal Trade Commission approve the deal, Folgers will issue Folgers common stock amounting to 1.1524 times the number of Smuckers shares outstanding. Folgers will give this stock to Procter & Gamble. Folgers will then borrow $350 million and pay it to Procter & Gamble as a dividend.
• Procter & Gamble then will deliver the Folgers shares to an exchange agent who will hold the shares in trust for PG's shareholders. Procter & Gamble shareholders will have the opportunity to exchange some or all of their shares for Folgers stock. The price at which the shares are exchanged will be determined by Procter & Gamble. It will be based on the prices at which PG and Smuckers are trading, and there will be a certain discount for PG shareholders. One of the deal's conditions is that at least 59% of the Folgers shares are exchanged for Procter & Gamble shares. If some Folgers shares are left over, they will be distributed (and converted into Smuckers shares) to PG shareholders as a pro rata dividend at a rate determined by the exchange agent.
• A subsidiary of Smuckers will merge into Folgers. The Folgers shares will then convert into the right to receive one Smuckers share for each Folgers share. Folgers shareholders will then own about 53.5% of the new company, while current Smuckers shareholders will own 46.5% of the new company.

The deal is expected to be beneficial for both Procter & Gamble and Smuckers:

• PG will have $350 million less debt on its balance sheet and won't have to worry about a low margin brand to which it hasn't been paying much attention.
• Smuckers, which can better focus on Folgers and which previously bought and successfully turned around PG's Jif and Crisco brands, will add around $1.6 billion to its annual sales.
• Currently at 0%, coffee is expected to produce 42% of Smuckers’ future sales.
• After the transaction, Smuckers will be more than double its current size.

Disclosure: At the time of writing, author owns PG.

Comments

[mixter:]

Only a damn lawyer and/or a bean counter could have worded this agreement! Just what the hell is in it for a PG stock holder?

KISS!

2008 Sep 23 09:38 PM

[Wolfhounds:]

Actually, we tax accountants love the wording of this agreement. It not only accomplishes the intent of the parties, to transfer one business owned by a much larger entity to another entity, but does so to qualify as a tax free exchange under section 368 of the IRC. Without this carefully crafted agreement the deal could not have been done.

2008 Sep 24 08:33 AM

[barney6345:]

I still don't know what the benefit is for PG shareholders. What does a PG shareholder who owns say 100 sh have at the end of this? And when?

2008 Sep 24 12:24 PM

[barney6345:]

I still don't know what a PG shareholder gets out of this. Someone who owns 100 sh gets what? And when?

2008 Sep 24 12:25 PM

[SunsetKid:]

As a Smucker's shareholder, I think this is a bad deal. They are paying a lot of money for a dying brand in an ere where younger people eschew the branded coffees of our parents. I will be selling (AFTER the $5 dividend).

2008 Sep 24 04:02 PM

[Happyday:]

With all the confusing deals that has got our country in trouble, here comes another one. I have been a P&G stock holder for over 60 years and have never seen anything like this. There is nothing for the average stockholder if he or she doesn't want to gamble their shares of stock.

2008 Oct 10 07:24 PM

[johnnysize:]

Ok folks... here u go. For every 100 shares of PG u own u will recieve 1.14x pg/sjm - that ratio is about 1.6 shares right now. So 1.6 x sjm gives u a value in PG about 8 dollars higher. So effectively, If u exchange your PG u will end up with SJM at a discount to where it trades, or a premium to PG...however u want to look at it. The problem is this... you will not recieve the full 1.6 shares because it is subject to proration(which could be as little at 3%) and the 1.6 shares is not fixed. It will be determined on a 3 day averaging period 2 days before the closing of the exchange (Nov 5th). Also, there is a cap on the trade of 1.7213 shares as to protect the market from simply jamming SJM down too far and jacking PG to the moon. Leave this one to the pro's unless you own less than 100 shares because I do believe odd lot shareholders will NOT be prorated.

2008 Oct 13 11:29 AM

[rangerbill:]

It would be nice to diversify, but like most holders of pg why move to an unknown? one could do this with deep pockets, As a small holder for many it might be wise to sit tight.

2008 Oct 21 12:00 AM

[Debbie Deaton:]

I purchas P&G stock from each paycheck. I currently have 64 shares that I must do something with. I don't understand the legal papers I received so i don't know what to do. If I don't reply does it stay P&G or do it automatically go turn to Smuckers stock? I just don't understand this crazy stuff. If anyone can help me with what to do or explain what my options are in kindergarden terms, I'd greatly appreciate it.

2008 Oct 22 09:05 AM

[conncurt:]

If you do nothing you will remain in P&G stock unless all the shares are not exchanged by those who agree to participate. The shares left will be paid to the P&G stockholders as a special stock dividend on a pro-rata basis of your ownership. There was an earlier post that details how it works and he does a pretty good job of it. The offer is just allowing you to exchange some or all of your P&G shares into Smuckers, but you are not required to do so. Hope that helps.


On Oct 22 09:05 AM Debbie Deaton wrote:

> I purchas P&G stock from each paycheck. I currently have 64 shares
> that I must do something with. I don't understand the legal papers
> I received so i don't know what to do. If I don't reply does it stay
> P&G or do it automatically go turn to Smuckers stock? I just don't
> understand this crazy stuff. If anyone can help me with what to do
> or explain what my options are in kindergarden terms, I'd greatly
> appreciate it.

2008 Oct 22 04:17 PM

[Bob_Taylor:]

Still no one has answered what about the shareholder who does nothing. How will we be compensated for the loss of a $3 billion chunk of the company? Where in this transaction is Smuckers paying for Folgers? It looks like I still have the same amount of PG which is a smaller company.

2008 Oct 22 07:51 PM

[novicester:]

can u break it down further for someone w less than 100 shares do u request the exchange of shares or do nothing? the prospectus and ur ratios r hard to follow

2008 Oct 23 08:29 AM

[Bob_Taylor:]

If I had <100 shares I'd go for the swap. Tight now you will get appx. $1.52 in Smuckers for every $1 of P&G. It also depends on whether or not you are going to have to pay a brokerage charge and how much. Schwab is charging me $19.95. Because of that I'm moving to Fidelity after 11/1.

2008 Oct 29 11:12 AM

[PG shareholder:]

I understand most of the plan and am trying to figure out if as a PG shareholder it makes sense to apply. The benefit is that I get a 1.14 shares for every PG share. On the surface this sounds like an immediate gain. However I noticed in the prospectus that Smuckers need to pay PG $350 million as a 1 time dividend payment. This $350 million happens to be 14% of the current value of Smuckers. Does this dividend payout from Smuckers to PG negate the immediate gain I thought I was getting when the # of shares went from 1 to 1.14?

2008 Nov 01 08:14 AM

[No more work:]

Smucker and P&G told employees that there would be no layoff and one week after the deal was closed already they are getting rid of some of there employees..There goes my profit sharing

2008 Nov 13 09:22 PM