P&G a Step Closer to Unloading Folgers, Pringles

Company Hires Blackstone, but Move Doesn't Necessarily Mean Sales Are Imminent

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BATAVIA, Ohio (AdAge.com) -- Procter & Gamble Co. appears to be edging closer to selling its coffee and snack businesses, including its billion-dollar-plus Folgers and Pringles brands, according to people close to the company, though disposal of the $2 billion-plus Duracell battery business could be further away.
An analyst in May raised the possibility of P&G divesting slower-growing Duracell, Pringles and Folgers to boost its organic sales growth and stock price.
An analyst in May raised the possibility of P&G divesting slower-growing Duracell, Pringles and Folgers to boost its organic sales growth and stock price.

The Financial Times yesterday reported that P&G had retained Blackstone Group to manage auctions of Duracell, Pringles and Folgers. But a person close to the company believes the arrangement with Blackstone isn't an agreement to have it sell the companies for P&G and instead involves only exploring options for divesting the snack and coffee businesses. Some people close to P&G believe it will divest Folgers and Pringles first and may wait longer to divest Duracell.

Spokespeople for P&G and Blackstone declined to comment.

Pinnacle Foods
Complicating matters, Blackstone Group is principal owner of Pinnacle Foods, considered by some a candidate to buy Folgers or Pringles or both. Centerview Partners, another private-equity and financial-advisory firm with an interest in Pinnacle, includes former Gillette Co. CEO and P&G executive Jim Kilts as a partner.

Morgan Stanley analyst Bill Pecorriello in May raised the possibility of P&G divesting slower-growing Duracell, Pringles and Folgers along with its Iams business to boost its organic sales growth and stock price, but in a note Oct. 2 said he now doubts Iams would be included in divestitures.

P&G Chief Financial Officer Clayton Daley added fuel to divestiture speculation in August when he acknowledged the company would complete an internal review process on possible divestiture of brands this month.

Among the factors the company considers, he said, is whether businesses can deliver sustainable organic sales growth of at least 4%, something several people familiar with the businesses say Pringles, Folgers and Duracell are unlikely to do.

Why Kilts kept battery brand
Mr. Kilts, in his recent book "Doing What Matters," lays out his case for keeping Duracell -- struggling then as now -- when he became CEO of Gillette in 2001. Lack of a likely buyer was a principal reason, he acknowledged, but he also noted strong margins, growth prospects (including category volume growth of 4%) and the potential to respond to strong advertising, which he credited with strengthening the brand on his watch.

No P&G executives have yet made a similarly strong public case for keeping Duracell, which P&G CEO A.G. Lafley in a Fortune interview two years ago acknowledged was in a business that he didn't understand.

But Duracell does give P&G a presence in outlets such as home-improvement and convenience stores that it could use to help boost distribution for other brands. And the same lack of likely buyers could prevent a sale of Duracell now, as it did for Mr. Kilts.

Some familiar with the business believe a Japanese company, including Panasonic, could be interested, but private-equity buyers could be hard to find amid the recent tightening of credit for highly leveraged deals.

P&G may also want to improve the business before putting it on the market. With raw materials having risen, P&G's profit margin on Duracell has fallen by two percentage points since it acquired the brand last year, according to Deutsche Bank analyst William Schmitz.

Tax implications
Pringles and Folgers might also have trouble finding strategic buyers, and the tax hit P&G would take from selling brands that have relatively low cost bases to offset against sale prices could make it hard for the company to get the after-tax cash it would like. The tax implications, combined with the businesses being highly profitable, could mean divestitures -- even net of the $13.5 billion the brands could fetch being used to buy back stock -- could reduce P&G's net earnings per share by a penny or two, according to Sanford C. Bernstein analyst Ali Dibadj.

Among possible buyers of Pringles include some of the industry's biggest players, including Kraft Foods and General Mills.

But it's less clear whether strategic buyers might want to buy Folgers. One dark-horse candidate mentioned by some industry watchers is Germany's Tchibo, a coffee company that has expressed interest in moving into North America in the past and also has the majority stake in Beiersdorf, owner of Nivea, a brand long believed coveted by P&G and its global rivals in personal care.

Publicis Groupe's Saatchi & Saatchi, New York, handles Folgers. WPP Group's Grey Global Group handles Pringles, and independent Acme Idea Co., Norwalk, Conn., handles Duracell creative. Publicis' Starcom MediaVest Group and Aegis Group's Carat handle communications planning, and SMG handles media buying for all the brands.
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