Wednesday, November 26, 2008

Procter & Gamble could make further divestitures in battery, food and other units, sources say

* Duracell could be sold once market conditions improve 
* Pringles, Braun electric shavers and toilet paper business also potential sale candidates 
* P&G may prune some haircare products, but is unlikely to sell any major brands 
* Company used Morgan Stanley, the Blackstone Group, Davis Polk & Wardwell, Jones Day and Cadwalader, Wickersham & Taft LLP on Folgers divestiture 
The Procter & Gamble Company (NYSE:PG), in divestiture mode, could sell brands in its battery, food, appliances, toilet paper, and hair care units, industry experts said. 
Businesses that could go on the block include: Duracell, Pringles, Braun electric shavers and the company's toilet paper business, said the experts. 
The Cincinnati, Ohio-based company, which recently sold Folgers, its coffee business, for USD 3bn, is likely to continue divesting, two industry analysts said. 
After making a number of major acquisitions, the company is probably more likely to be a seller than a buyer of assets, P&G CFO Clayton Daley said, speaking during a Q&A session at a Deutsche Bank conference this June. 
Two units that appear primed for sale are P&G’s battery business, Duracell, and its one remaining snack business, Pringles. The company hired the Blackstone Group to review Folgers, Pringles and Duracell in 2007, according to a prior report from this news service. 
Duracell could be next on the divestiture list, as it has seen a decline in sales, said the first analyst. Whereas for the fiscal year 2008, volume for batteries was up mid-single digits, it was flat for the the company’s latest first quarter. Further, in the quarter, global market share of general purpose batteries declined about one point. However, P&G is waiting for the financing markets to revive before spinning off or selling Duracell, because the most likely buyers for Duracell are private equity firms, a first banker said. 
Pringles could have a harder time finding potential buyers, because it would have to be sold through a Reverse Morris Trust, a transaction structured to allow a tax-free merger between two companies, because it has a higher tax basis than Duracell, said another banker. Finding a Reverse Morris Trust partner can be difficult given size requirements for the procedure. For instance, Kraft Foods has been thought to be interested in Pringles, but would be too large for a trust merger, the banker explained. 
Besides Duracell and Pringles, other units likely be moved to the divestiture list include Braun electric shavers, said a second industry banker. Proctor & Gamble CEO AG Lafley told analysts in the company's latest earnings call that P&G has been shutting down and “moving away” from some parts of the Braun appliance portfolio. The company divested its Braun thermometer and blood pressure monitors last year. 
Another business P&G is likely to review is its toilet paper business, a third industry banker said. P&G owns Charmin toilet paper, as well as Bounty kitchen towels and Puff facial tissues. 
As with any of its segments, P&G may prune small brands within its hair care division, which has limited growth prospects, two of the bankers agreed. But it is unlikely to sell any of its larger brands. In the past, Alberto-Culver has sought to buy the Aussie brand from P&G, but P&G has not been open to a sale, the second banker noted. 
On its Q1 earnings call, P&G's Lafley noted subpar performance on the part of Wella, the company’s German salon hair care subsidiary. However, he said P&G was working on turning Wella around, and defended P&G’s other hair care brands, saying that they were the best performers in the sector. 
The company has spent too much money assembling its hair care portfolio to abandon it, the first banker said. It recently bought Frederic Fekkai, a high-end salon and retail brand, another noted, and so seems inclined to fix its hair care business right now. P&G is probably shifting toward the high-end hair care spectrum, as is evident in its purchase of Frederic Fekkai, the first banker noted. 
Proctor & Gamble’s entire hair care unit is doing poorly versus its peers such as Alberto-Culver, noted the second industry banker. For the fiscal year ended June 2008, the company reported that its global hair care market share was in line with the prior year's level. Professional hair care volume, however, declined by mid-single digits, with the decline in care and styling offsetting the growth in color products. In the company’s latest Q1 results, it reported that globally all major hair care brands contributed to volume growth. But Professional hair care saw a low single digit volume decline. Hair care is included in P&G’s beauty segment, and the company does not break out sales and earnings for hair care. 
Proctor & Gamble tends to make big divestitures every two years, the second banker noted. The company spaces out its divestitures in case such sales dilute the company’s results, the second banker explained. 
The company seems unlikely to divest its pet care business, focusing more on trying to turn it around, this news service recently reported. According to the first analyst, the company recently brought in new management to try and revive the brand, and seems committed to staying in pet care for a longer term. 
Proctor & Gamble, which has a market capitalization of about USD 192bn, declined requests for comment. It used Morgan Stanley, the Blackstone Group, Davis Polk & Wardwell, Jones Day and Cadwalader, Wickersham & Taft LLP on the Folgers divestiture. 


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