P&G Leaves Divesting Out Of Value-Building Tool Box – CFO

Procter & Gamble Co. considers its brand portfolio streamlining “pretty dramatic” but it is not sold on investors’ suggestions to take even bigger steps, divesting business units.

“I think that it continues to be a relevant and a good question,” said Chief Financial Officer Jon Moeller at the Morgan Stanley Global Consumer and Retail conference in New York on Nov. 18, after analyst Dara Mohsenian asked whether P&G would consider paring any businesses.

“If you look at what we’ve done over the last 18 to 24 months, selling 60% of our brands, I think that should give you confidence that we’re not averse to looking at pretty dramatic options,” Moeller said.

“But what I’ve learned through the experience is that it is a very difficult road to create value. When you split out a business or spin out a business, there are not synergies involved, there are typically dis-synergies. So while you get the tax benefit of [divestitures], you’re not typically getting paid for synergies.”

CFO Jon Moeller says P&G is "not averse to looking at pretty dramatic options."

P&G in 2014 launched a streamlining program aimed at shedding 100 under-performing brands and retaining 65 stronger brands by its fiscal 2017. The biggest step so far is a July agreement to sell hair care, cosmetic and fragrance brands to [Coty Inc.] (Also see "P&G To Cut Portfolio In Half, Refocus On Core In Simplification Strategy" - Pink Sheet, 1 Aug, 2014.).

However, investors are calling for bigger structural changes, particularly after the firm reported disappointing results for its fiscal 2015, which ended in June. Sales fell 5% to $76.3bn and organic sales grew only 1% (Also see "P&G Investors Demand Growth While Firm Emphasizes Efficiency" - Pink Sheet, 3 Aug, 2015.).

Deutsche Bank analyst Bill Schmitz acknowledges P&G’s reticence to splitting off business units, but suggests the firm eventually might lack other choices.

“To be sure, [P&G] has to look closely at this option if turnaround 2.0 fails,” Schmitz said in a June report, referring to the firm’s second attempt to resuscitate growth, which started after A.G. Lafley returned to the helm in 2013 after Bob McDonald struggled to steady the company and win back market share (Also see "Lafley Back At P&G Helm As McDonald’s Tenure Ends At Four Years" - Pink Sheet, 27 May, 2013.).

However, the company’s stock continued to decline under Lafley. Since P&G announced Lafley’s departure earlier in 2015, analysts have been eager to learn whether his successor, David Taylor, who took the helm Nov. 1, would make more aggressive moves to boost growth.

‘Sweet Spot’ Hard To Find

Discussing challenges and costs from spinning off or splitting assets, Moeller noted P&G’s 2014 agreement to sell its Duracell battery business to Warren Buffett’s Berkshire Hathaway holding company, a deal yet to close (Also see "Batteries Not Included: P&G Plans Duracell Divestiture" - Pink Sheet, 27 Oct, 2014.).

As part of the deal, P&G footed the bill for adding 450 employees to Duracell so it could operate as an independent business, he said.

Moeller also noted while P&G’s 2005 merger with Gillette generated around $1bn in cost synergies, divesting the business would be “a very value-destructive event.”

There is a “sweet spot,” however, in spinning off business units, Moeller acknowledged.

P&G would prefer to divest businesses in Reverse Morris Trust transactions, in which a firm spins off a subsidiary as a separate company still owned by its shareholders and then merges it with an acquisition target to create an entirely new company in a transaction with more favorable tax implications.

In those deals, “you can capture both the synergies of a buyer who is willing to pay you for some of those and execute it in a tax-deficient manner,” Moeller said.

But those opportunities are rare. “The requirements for the size of the companies participating in that kind of structure, et cetera, are very stringent and it’s hard to find arrangements that work,” he said.

“If you took apart all of Procter & Gamble and depending on how many pieces we took it apart into, you would potentially trigger a change of control clauses in all of your contracts. Is that a good thing or a bad thing? I don’t know, but you need to think through it. Many of our tax arrangements across the world are predicated on a certain level of employment, a certain level of revenue. These would all have to be renegotiated.”

Escape Retail Shelf ‘Clutter’

Mohsenian asked about P&G’s organic sales growth aspirations, noting the firm forecast positive organic sales growth during the current quarter and improvement in the back half of its fiscal 2016. She asked whether P&G plans to boost organic sales growth through innovation or advertising and promotion.

The firm will increase spending on innovation and advertising, “whether that’s baby stores or beauty specialty stores or e-commerce,” Moeller said. “We’ll invest, when we have the right products and programs, behind sampling and marketing.”

He said retail stores have amassed SKUs on their shelves, with some increasing their shelf assortments by as much as two times over the past five years, but same-store sales growth across most chains has not grown nearly that much.

Investing in displays and other point-of-purchase communications with consumers “gets you out of that clutter that’s on the shelf,” he said.

“The amount of consumer confusion that’s associated with that complex assortment is inhibiting purchases. You’ll watch a consumer trying to make sense of a shelf and walking away, because they just, they literally give up.”

Moeller added P&G has numerous marketing tools to choose from in digital, mobile and social media. “We’re really dealing with an explosion of supply from a marketing tool standpoint. The ability to target is better than it’s ever been,” he said.