CINCINNATI - Procter & Gamble Co. told investors Wednesday that it’s “not averse to looking at” breaking the company into smaller pieces, but cautioned that the complexities of such a move could prove enormous and ultimately unwise.
Chief Financial Officer Jon Moeller outlined the complexities in more detail than P&G has previously provided at the Morgan Stanley Global Consumer & Retail Conference in New York Wednesday.
“It continues to be a relevant and a good question,” Moeller said. “We're not averse to looking at that as a topic.”
Bernstein Research analyst Ali Dibadj considers the P&G response “a positive change” and a sign that the company is acknowledging pressure from investors to consider bigger structural reforms. Dibadj has long argued that P&G shares could be worth up to 18 percent more if split among two or three smaller companies. He surveyed 62 institutional investors in June and said two thirds of them favored the breakup idea.
“Investors want the company to improve and it’s not going to improve in the status quo,” Dibadj said. “Other options like a break up are being looked at for sure.”
A P&G spokesman said Moeller’s comments should not be construed as a sign that P&G is considering a breakup more seriously. Moeller simply provided a more detailed explanation for why the idea was rejected in the past.
“Jon’s point was that as a company, we aren’t opposed to looking at various options for how best to drive shareholder value,” said P&G spokesman Damon Jones. “But to be crystal clear, we don’t feel a breakup best serves shareholders.”
Moeller said P&G could create millions of dollars in new expenses if it split the company into smaller pieces. Moeller called these new expenses “dis-synergies,” meaning the opposite of the synergies that acquiring companies typically promise shareholders when they acquire rivals.
“When we bought Gillette, we generated about $1 billion in cost synergies,” Moeller said. If “we split Gillette out, I don't know if all that $1 billion comes back, but a big number comes back.”
The end result, said Moeller, is “a very value-destructive event” for P&G shareholders.
“If you look at Duracell right now, we're adding 450 employees to the Duracell company in order for it to operate as an independent unit,” he said.
P&G is selling Duracell to Warren Buffett's Berkshire Hathaway in a deal valued at $3 billion. It's expected to close early next year. P&G is also selling 43 beauty brands to Coty Inc., in a deal that's expected to close by the end of next year.
“If we took apart all of Procter & Gamble, depending on how many pieces we took it apart into, you would potentially trigger change of control clauses in all of your contracts,” Moeller said. “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. Those would all have to be renegotiated.”
P&G has struggled to grow revenue in recent years because of foreign currency fluctuations and a premium product mix that consumers rejected when the economy weakened. P&G responded with a “shrink to grow” strategy in that resulted in the divestiture of more than 90 brands and an aggressive cost-cutting program that allowed for increased investments in the “core brands” with the best potential for growth.
Despite the monumental changes, Dibadj argues P&G remains “fat relative to its peers” and has yet to prove that scale gives its brands a competitive advantage.
“Part of the problem is the gummed up decision making of such a large company,” Dibadj said. “It’s just too big.”
Wednesday’s conference call marked the first time P&G highlighted the potential difficulties of splitting the company into smaller parts. Before today, P&G leaders focused on the growth prospects of those core brands.
“Just look at our track record of growing and creating value with the 10 categories that we're maintaining,” Moeller said Wednesday. “It's very strong. We're market leader in seven of those categories. So we haven't suffered in those categories as a result of inclusion in Procter & Gamble. I think we've benefited.”
