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Jul 17, 2017

Struggles at Procter & Gamble Draw Scrutiny of Nelson Peltz: DealBook | NYT - July 17, 2017


www.nytimes.com
Julie Creswell and Michael J. de la Merced

Photograph by Tony Cenicola/The New York Times; Illustration by The New York Times
Tide detergent dominated the American laundry room for decades and helped make Procter & Gamble a consumer products behemoth.
But consumers have increasingly been shunning premium-priced brands like Tide for cheaper versions of laundry detergent. And the detergent market is just one of many in which Procter & Gamble is battling to keep bargain-hunting customers.
Across a number of its mission-critical, multibillion-dollar product lines — from Pampers diapers to Olay skin creams to Gillette razors — Procter & Gamble is fighting to retain its market share.
Those struggles have now attracted the attention of Nelson Peltz, a billionaire investor and activist shareholder.
Arguing in a regulatory filing that the company was in need of a shake-up, Mr. Peltz announced on Monday that he was seeking a seat on the board of Procter & Gamble. His investment firm, Trian Fund Management, disclosed a $3.5 billion stake in February.
The filing signals a ratcheting-up in the size of the corporate targets of activist investors, who through behind-the-scenes cajoling or sometimes high-profile public proxy wars try to force companies to change their strategies with an eye toward profits for themselves.
Activist investing has attracted larger and larger pools of money, allowing managers like Mr. Peltz to hunt for ever-bigger corporate game. A proxy fight at Procter & Gamble, which has a market value of nearly $225 billion, would be among the biggest in corporate history.
And Procter & Gamble, based in Cincinnati, is merely the latest consumer-driven company to capture the attention of activist investors.
Last month, Daniel S. Loeb’s hedge fund, Third Point, said he would agitate for changes at Nestlé, and Jana Partners had earlier pressured the retailer Whole Foods to revamp its board. Whole Foods ultimately announced that it would sell itself to Amazon.
This is not the first time that Procter & Gamble has faced activist pressure: The billionaire William A. Ackman pushed the board to oust Robert A. McDonald as chief executive in 2013, prompting Mr. McDonald’s predecessor, Alan G. Lafley, to return to the post from retirement.
Nelson Peltz in New York in 2013. His investment firm, Trian Fund Management, disclosed a $3.5 billion stake in Procter & Gamble in February. Heidi Gutman/CNBC
Companies with mature consumer brands — like Procter & Gamble, with its Tide detergent and Gillette razors — can be ripe targets for activists because their days of surging growth are often well behind them.
While companies may want to keep the brands, enjoying the cash they can generate, activist investors tend to be more aggressive in their approach. They often look for ways to sell the brands and reinvest in new technologies or brands that can generate better growth opportunities, said Damien Park, a managing director at Spotlight Advisors, a firm that consults with companies and funds on activist campaigns. (Mr. Park is not involved in Mr. Peltz’s crusade with Procter & Gamble.)
That Procter & Gamble has become the quarry for activist investors is a sign of how far the once-iconic giant has fallen.
For years, Procter & Gamble attracted the best-and-brightest marketing M.B.A.s from the nation’s top schools. It spurred many a Harvard Business School study of its internal methodologies and disruptive innovations. And it was the home to many big consumer hits, like the Swiffer duster and Crest Whitestrips.
But thanks in no small part to lackluster economic growth overseas, combined with a strong dollar, Procter & Gamble has had 13 consecutive quarters of sales declines. Its shares have lagged behind the Standard & Poor’s 500-stock index.
The company is on its third chief executive, David Taylor, in eight years. It is slashing billions of dollars in costs and shrinking its work force.
To meet the challenges, Procter & Gamble has moved quickly to reduce its portfolio of brands, selling about 40 beauty brands, including CoverGirl makeup and Clairol Nice ’n Easy hair coloring, to Cody last year.
But analysts say what has gone missing from Procter & Gamble is innovation, new products or designs that will spur top-line growth.
“Olay hasn’t grown in years,” said Mark Astrachan, an analyst with Stifel Financial. “Pantene has been relaunched I don’t know how many times at this point. On shaving, it was not focused on the fact the market was moving online and to products offered at a lower price point. It didn’t launch a shaving club until it had lost considerable market share.”
And while the company is beginning to lower the prices of its goods to compete with less expensive products, the prices of its brands are, on average, 40 percent higher than the average price in the category, said Ali Dibadj, an analyst at Bernstein Research. Tide is twice the average price in the laundry detergent arena, Mr. Dibadj said.
For now, Mr. Peltz has emphasized cutting costs and trimming the layers of management bureaucracy at Procter & Gamble, but not much else.
Since taking its stake in Procter & Gamble in February, Trian had held about a half-dozen meetings with the company, outlining its arguments, according to two people briefed on the matter. The company made its own counterarguments, including asking for more time to prove the worth of its current strategy.
Those discussions reached a head last week when Procter & Gamble formally declined to give Mr. Peltz a seat.
In a statement on Monday, the company said it had had “an active and constructive dialogue” with Trian. It also said that its board was “confident that the changes being made are producing results” and that it “expresses complete support for the company’s strategy, plans and management.”
Trian said Monday that it was not seeking to break up Procter & Gamble — a well-worn tactic of activists — or seeking to replace David S. Taylor, who has been the company’s chief executive for less than two years. If Mr. Peltz is elected, Trian said, the firm will renominate the director who had been defeated, effectively expanding Procter & Gamble’s board by one seat.
For the most part, Trian has tended to apply pressure behind the scenes with corporate management, a self-described “constructivist” tact. Mr. Peltz meets regularly with management teams and board members, often discussing lengthy analyses that the firm has put together. (The firm’s “white paper” on General Electric ran to about 80 pages.)
Since setting up Trian in 2005, Mr. Peltz and his partners, Peter W. May and Edward P. Garden, had resorted to proxy fights just twice before Procter & Gamble. That is out of 23 campaigns at 20 companies, according to data from FactSet.
Trian’s win rate in its proxy fights is 50 percent. In the battle against the ketchup maker Heinz for board seats, Trian won two of the five seats it sought. But with the chemical maker DuPont, shareholders rejected Trian outright and re-elected all of the sitting directors, although the company’s chief executive, Ellen J. Kullman, retired five months later, after the company fell short on financial performance targets.
People with knowledge of Trian’s interactions with Procter & Gamble stressed that the discussions had been cordial, with the two sides agreeing on a number of issues.
While Mr. Peltz has not signaled any interest in breaking up Procter & Gamble, some analysts say that could still be the ultimate outcome.
“For almost a decade, they have been talking about improvement, and for all of their efforts and advantages, I haven’t seen it play out at all,” said Mr. Dibadj, the Bernstein analyst, who has advocated a breakup of the company. “This is an organization that is simply too big and too complex.”