Tags: P&G | Ackman | advisers | investor

P&G Said to Seek Advisers as Pressure From Ackman Mounts

Monday, 16 July 2012 10:19 AM

Procter & Gamble Co. has spoken to financial and communications advisers to help manage an activist investor as demands grow to jettison executives or assets, said people familiar with the matter.

P&G may hire both an external public-relations firm and banks in coming days, said one of the people, who asked not to be identified because the discussions are private. The Cincinnati-based company has typically used Goldman Sachs Group Inc. and Morgan Stanley as advisers on deals.

The maker of Tide, Pampers and Crest is under pressure from investors frustrated after Chief Executive Officer Robert McDonald reduced P&G’s profit forecasts three times this year. Investor Bill Ackman last week bought into the company with what he called his biggest initial stake ever and is likely to push for a management change and large asset sales, said another person familiar with the matter.

The Duracell battery and Iams pet food units are seen inside P&G as businesses where innovation is needed to justify keeping them, people familiar with the matter said. Even before Ackman’s purchase, P&G had spoken with advisers to assess interest in those assets, other people familiar with situation said. Duracell may fetch as much as $4 billion and Iams would probably sell for about $3 billion, one person said.

“We will not comment on wild rumor and speculation,” said Paul Fox, a spokesman for P&G. “We are very focused on returning to growth.”

McDonald Pressure

Ackman’s involvement “intensifies pressure on McDonald and his team to execute,” Matt McCormick, a fund manager who helps oversee $6.2 billion, including P&G shares, at Cincinnati-based Bahl & Gaynor Inc., said in a telephone interview.

Some P&G directors are dissatisfied with McDonald and are discussing a possible leadership change, people familiar with the matter said last week. The 59-year-old CEO has come under fire as being slow to cut costs and recognize challenges from currency and commodities, and for mistiming price increases.

“Their brands are all viewed with a positive, but the margins aren’t there and then when you get commodities pressure coming in, it eats into those margins and then it’s reflected in the stock price,” fund manager McCormick said.

During McDonald’s three-year tenure, P&G shares gained about 25 percent through July 13, compared with 58 percent for Huggies and Kleenex maker Kimberly-Clark Corp., 52 percent for Unilever and 46 percent for Colgate-Palmolive Co. P&G fell 0.9 percent to $64.48 at 9:33 a.m. in New York. The shares advanced 3.7 percent on July 12 after U.S. Federal Trade Commission disclosed that Ackman’s Pershing Square Capital Management LP had invested in P&G.

Ackman Stake

Ackman’s stake was valued at about $2 billion, a person familiar with the matter said.

McDonald became CEO of the world’s largest consumer products company in July 2009, handpicked by predecessor A.G. Lafley. Unlike Lafley, who bought Gillette for $57 billion in 2005, McDonald declined to bet on a big acquisition to build sales. Instead, he opted to win new customers by extending brands and bringing more products to the developing world.

To reach P&G’s goal of attaining 5 billion customers by 2015, the hands-on McDonald has walked store aisles around the world, making sure the company’s products are displayed correctly, e-mails top retail customers regularly and scrutinizes data from P&G’s own marketing information systems that can crunch up 10,000 scenarios simultaneously. He has made home visits from Russia to China to see how customers use P&G shampoo, skin cream and detergent.

As McDonald traveled, cost pressures were building. Prices for everything from wood pulp to resin were on the rise. Plus, during the boom years, P&G added management layers.

Reducing Expenses

P&G is “fat around the middle,” said Connie Maneaty, an analyst at BMO Capital Markets in New York. “It’s not a nimble company anymore. Decisions don’t appear to be made easily.”

The company waited until February to start a comprehensive cost-cutting program, vowing to reduce $10 billion in expenses through 2016 by cutting headcount and streamlining operations.

Ali Dibadj, an analyst at Sanford C. Bernstein & Co. who said he welcomes Ackman’s involvement, questioned the planned savings in a note last week, estimating that P&G’s plan would actually save closer to $4 billion.

P&G must cut “significantly more costs,” particularly in overhead and manufacturing, Dibadj wrote July 13.

Dibadj, who is based in New York, also prodded the company to prune its “convoluted, redundant, heavy organizational structure” and to present a succession plan by year-end.

Developing Markets

The increased dependence on markets outside the U.S. has made the company more vulnerable to currency swings, with a strengthening dollar this year reducing the value of its overseas sales. And in the developing world, P&G lost market share for certain items as it raised prices to counter rising commodities costs.

In May, P&G said it would renew emphasis on its developed markets and focus on the 40 top businesses that account for more than half of its sales.

“We may have overextended ourselves a bit with the pace of our portfolio and geographic expansions,” Chief Financial Officer Jon Moeller said at a conference in New York.

P&G raised prices in the past year to lessen the impact of rising costs. By January, however, McDonald noted on an earnings conference call that the move had hurt market share the previous quarter. In April, the company said that while consumers had come to accept most of its increases, it would roll them back in six categories including laundry and oral care in the U.S.

Market Share

“They tried to manage through the short term with price increases but finally realized they couldn’t do it, because competitors didn’t follow,” said Peter Golder, a professor at the Tuck School of Business at Dartmouth College in Hanover, New Hampshire. “What they need to be most concerned about is losing market share. Only 10 percent of leading brands that lose market share ever get it back.”

Analysts on an earnings conference call in April grilled McDonald about P&G’s performance compared with competitors.

“I’m just trying to understand how long do you expect investors to wait,” Dibadj said on the call. “How long does your current plan have to work? How much patience does the board have?”

McDonald responded by saying he would put the right leaders and programs in place to boost growth.

“It is my fault,” he said. “I am the CEO of the company. I do take responsibility.”

Size Challenge

The company’s sheer size -- it has dozens of brands and operates in about 80 countries -- is one challenge. To achieve even the bottom end of its forecast 2 percent to 4 percent revenue growth this fiscal year, P&G would have to add more than $1.65 billion in sales, or almost a third of Kimberly-Clark’s 2011 total. P&G reports its 2012 fiscal-year results Aug. 3.

Executives have highlighted revenue growth, including strong sales of premium-price products such as Gillette Fusion ProGlide razors, and say they’re working to forge a more efficient culture. The company has had 10 consecutive quarters of organic sales growth averaging 4 percent, in line with its peers, McDonald said at an investor conference last month.

“Our execution has been inconsistent,” McDonald said. “We’re working to instill a much bigger focus on productivity and cost savings throughout the organization to fuel investments in growth, while becoming a faster, more agile company.”

The company’s operating margin, or the percentage of profit left after subtracting product and selling costs, has narrowed to about 16.5 percent, from a five-year average of about 19.6 percent, according to data compiled by Bloomberg.

Dibadj, who has even advocated that the company consider a breakup if results don’t improve, said it could be too little, too late.

“Can it be fixed?” Dibadj said in a telephone interview. “Absolutely. Are they on the path to fixing it? I think so, but it’s just too slow.”

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Monday, 16 July 2012 10:19 AM
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