Analyst: New activist investor increases chance of a Procter & Gamble breakup

Trian Fund reveals stake in P&G
Posted at 7:58 AM, Feb 15, 2017

CINCINNATI - Procter & Gamble Co. shares are rising on reports that Trian Fund Management, an activist hedge fund, has acquired a more than $3 billion stake in the consumer-products giant that has struggled in recent years to grow revenue and profits.

Based on P&G’s past experience with activist investor Bill Ackman, some experts are saying the investment increases pressure on CEO David Taylor to cut costs and reconsider breaking the company into smaller pieces.

“The probability has clearly gone up,” said Bernstein Research analyst Ali Dibadj. “If the path to improve the company is only a breakup, I think it’ll happen. If there are different paths to improve, which I think there are for P&G, those paths will come first.”

P&G shares hit a two-year peak of $91.10 before falling back to $90.46 in mid-day trades. That’s up 2.6 percent from yesterday’s close.

Trian hasn’t announced what change it’s seeking, if any.

“We welcome investment,” P&G spokesman Damon Jones said.

Trian Partners revealed a $540 million purchase of P&G stock in an SEC filing late yesterday. But that filing only covered shares acquired through Dec. 31. Sources told CNBC and the Walll Street Journal that Trian has acquired up to $3.5 billion in P&G stock.

That would make Trian a roughly 1.5 percent owner of P&G. It’s a bigger investment than Ackman made in 2012, when P&G responded with a massive restructuring that shed more than 90 brands and 30,000 jobs. P&G employs 10,500 in Cincinnati, compared to 12,000 three years ago.

Dibadj said Trian has “a very good track record of creating more speed of improvement in companies.” P&G’s management and board will face “more pressure to perform,” now that Trian has assembled a sizable stake. “There’s already pressure, but the whole organization will be concerned about this news,” he said.

Founded in 2005 by principals Nelson Peltz, Ed Garden and Peter May, the New York-based hedge fund has about $10 billion in assets under management.

Past investments include a $1.9 billion stake in Dupont, where Trian pushed for a break up and battled the company for seats on its board. Although it lost that 2015 proxy fight, Trian claimed credit for the company’s spinoff of Chemours, a specialty chemicals company.

Trian has a more cordial relationship with General Electric Co., where it announced a $2.5 billion stake in October 2015. It has urged the company to increase its profit margins, but has generally endorsed the strategies of CEO Jeffrey Immelt.

Trian Fund principal Nelson Peltz told CNBC on Dec. 5 that the hedge fund was acquiring a large stake in a company he declined to name.

“I hope that we’ll be able to talk in confidence with management and the board,” he said.

Procter & Gamble has struggled to convince investors that a “shrink to grow” strategy announced by former CEO A.G. Lafley in 2015 will lead to rising revenue and profits.

Dibadj has argued for years that P&G shares could be worth more if the company divided its brands into two or three smaller companies. P&G has resisted that idea, saying its 65 remaining brands operate more efficiently under one roof.

“It’s too big of a mess” as one company, Dibadj argued late yesterday. “You have to kind of shoot high I think toward a break up because I think that’s the way you get to board change and management change and compensation change and accountability change and running the company better.”

Dibadj isn’t the only analyst commenting on a potential breakup.

"While P&G has taken sensible steps to enhance shareholder value recently, the perceived value of a P&G break-up is likely to re-emerge," wrote Jefferies analyst Kevin Grundy.

“A breakup, while possible, is the most extreme scenario and therefore the least likely outcome,” said John Meyer, portfolio manager and securities analyst for Meyer Capital Management in Anderson Township. “Trian has a history of working cooperatively with companies at the board level to influence strategy and improve business performance.  That is likely to occur at PG before any serious pressure to breakup the company is applied.”

Meyer Capital has current and former P&G employees as clients and its president, Tim Meyer, is a P&G alumnus. It’s been advising clients to diversify and doesn’t hold a large position in the company. But it will be watching closely in the months ahead, John Meyer said.

“With 23 brands with annual sales of $1 billion or more, a number of analysts have long advocated breaking up the company to unlock greater growth potential,” he said. “I think it will be interesting to see if David Taylor & Co. are more receptive to outside influence this time around.”