Unilever Merger or P&G Breakup? Both Proposals Point to Cost Savings

In the same week that Kraft Heinz proposed to buy Unilever in a bid to put two of the biggest marketers together, it was revealed that Procter & Gamble Co. has an activist investor at its door who many believe will agitate for a breakup. Nelson Peltz's Trian Fund Management disclosed that it has accumulated an investment in P&G that's grown to $3.5 billion. Mr. Peltz has spurred big breakups of Kraft Foods in two waves this millennium, most recently the 2011 Mondelez spinoff, and unsuccessfully pushed for PepsiCo to split from Frito-Lay. The breakup logic flies in the face of the proposed Kraft Heinz-Unilever merger, which would produce a behemoth with $84.2 billion in annual sales—about the size of P&G before a 100-brand purge spurred by another activist investor, Pershing Square Holdings' Bill Ackman, five years ago. What's going on here? The short answer may be financial gamesmanship. These two divergent paths have one goal: cost cutting. Bundling argues for "synergies" that can be achieved by centralizing the workforces of two companies and eliminating redundancies; breaking up argues for creating a smaller organization with lower costs—and making those pieces more affordable for another conglomerate to swoop in and buy them. Interestingly, P&G beat Unilever, along with rivals Colgate-Palmolive and Kimberly-Clark, in organic sales growth last quarter, the second straight quarter of surprisingly strong performance for P&G and disappointments for those rivals after a decade of routinely outperforming the Cincinnati giant. P&G's recent signs of a turnaround may have actually encouraged Mr. Peltz to get involved, said one analyst, since it provides momentum that could limit downside risk, lock in profits and increase the appearance of a successful intervention. Trian declined to comment. A P&G spokesman said the company welcomes all new investors but declined to say whether it had talked directly to Mr. Peltz. Trian's stake is sure to be discussed, however, at this week's Consumer Analyst Group of New York meeting in Boca Raton, Fla., where P&G is a presenting company. Ultimately, the companies where Mr. Peltz has taken a stake and an interest have been better for his input, growing faster and getting more profitable, whether they split up or not, including Kraft, PepsiCo and Cadbury, said Bernstein Research analyst Ali Dibadj. The most likely next step, based on Trian's track record at PepsiCo, is a white paper detailing the case for a P&G breakup, exploration of merger and acquisition options, and suggestions for productivity and cost-savings gains—or hiring new management from outside, said Deutsche Bank analyst William Schmitz. He's among skeptics of a breakup theory, or of major impact from Mr. Peltz. P&G would be better off, he said, to "not rip out more costs or introduce further financial engineering" given that it's already on its second $10 billion round of cost cuts. "Three $20 billion businesses are no more agile than one $70 billion business," he said. "Growth challenges require a lot more than celebrity board members and more aggressive cost savings." Morgan Stanley analyst Dara Mohsenian said in a note that even three pieces of a broken-up P&G would still be too big to make them ready takeover targets, which would cap investor gains. And he said P&G lacks an obvious "crown jewel" to sell for quick gain.

Unilever Merger or P&G Breakup? Both Proposals Point to Cost Savings

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