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Trian's P&G stake raises investor hopes of break-up, cost cuts

By Michael Flaherty and Siddharth Cavale

Procter & Gamble Co (PG.N), maker of Tide detergent and Gillette razors, will face ever greater pressure to slice costs and slow-growing divisions now that activist investor Trian Partners is a major shareholder.

P&G’s shares hit a two-year high on Wednesday after Trian disclosed a stake in the consumer products behemoth, which is already trying to slim down by selling unprofitable brands. A person familiar with the matter told Reuters that Trian currently holds more than $3 billion of P&G’s stock.

Trian has a track record of pressuring large consumer companies to break up, a history that investors and analysts are seizing on with the fund’s newest investment.

“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,” Jefferies analyst Kevin Grundy wrote in a note.

Bernstein Research said in January 2016 that it conducted a survey of P&G’s institutional investors and found that two-thirds favored a break-up.

A break-up could result in its beauty, grooming and healthcare division becoming one company, with P&G separating out everything else, such as its laundry and diaper units.

Such a move would result in greater stock returns versus smaller divestitures, Bernstein analyst Ali Dibadj said in a note on Wednesday. Cost and revenue benefits from “scale” have been elusive for P&G, he said.

Growth in its beauty division has slowed, while baby, feminine and & hygiene products such as Pampers has improved.

Among the brands that investment bankers and analysts have said could be sold off are Braun and Clearblue. The company’s paper business may also come under the microscope, which includes Bounty paper towels and Charmin toilet paper, bankers and analysts told Reuters.

P&G has been selling off unprofitable brands – including 41 beauty brands to Coty Inc (COTY.N) – and focusing on core brands such as Tide, Pampers and Gillette to revive sluggish sales.

However, the efforts have failed to boost its stock much beyond where it traded two years ago.

TRIAN STAKE

Trian, founded in 2005 by Nelson Peltz, Ed Garden and Peter May, focuses mainly on consumer brand companies, industrial firms, and financial companies. The firm has $14 billion in assets under management.

Trian Fund Management LP disclosed in a filing on Tuesday that it held 6.4 million shares, worth $556.8 million as of Dec. 31 of last year. That position has grown to more than $3 billion as of Tuesday, the person familiar with the matter told Reuters.

Trian declined to comment on Wednesday.

P&G Spokesman Damon Jones declined to immediately comment on the break-up speculation on Wednesday. Jones said on Tuesday that P&G welcomes new investors and that the company will continue with its strategy.

Some analysts were not convinced about the need for radical changes at P&G.

“We see Trian’s P&G stake as late in the company’s turnaround process,” RBC Capital markets analyst Nik Modi wrote.

P&G CEO David Taylor has been in place since 2015, making it unlikely that Trian will seek to unseat him given his relatively short time at the company.

Modi said Taylor is appropriately managing the business and addressing the three major buckets that Trian could address: portfolio alignment, cost and revenues.

P&G’s shares were up 3 percent at $90.52. The stock was the biggest boost to the Dow Jones Industrial Average .DJI.

(Additional reporting by Sruthi Ramakrishnan in Bengaluru and Martinne Geller in London; Editing by Sriraj Kalluvila and Nick Zieminski)

Reuters