Activist investor Nelson Peltz on Monday said he is seeking a director seat for himself on Procter & Gamble Co.'s (PG) board, setting the stage for the largest boardroom battle in U.S. history and one that will likely determine whether the consumer goods firm will take steps to sell assets, cut costs and trim what the insurgent investor sees as "suffocating bureaucracy."
TheStreet had expected the move, in part, because last month Peltz had successfully driven another large target, General Electric Co. (GE) to oust its CEO Jeff Immelt without the need for a director-election battle. With GE on the road to potential transformation, Peltz and his team at Trian could turn their full attention over to Procter & Gamble, whose share price had continued to slide in recent months.
The director battle at Procter & Gamble will be a massive undertaking because of the company's $223 billion market capitalization. As the largest director-election proxy fight in U.S. history, it's bigger than the battle Peltz waged in 2015 at DuPont Co. (DD). The markets initially were not impressed with Peltz's endeavor, with shares down about 0.24% in pre-market trading.
Nevertheless, if there is any activist that could have success with such a battle, it would be Peltz.
Consider Trian's 2015 director fight at DuPont, which until now has been the largest U.S. boardroom battle. Peltz started and narrowly lost that fight. However, he subsequently collaborated with the company to help engineer a combination with Dow Chemical that is now in the process of creating three different companies, a major victory for the insurgent investor.
At Procter & Gamble, Peltz may get a lot of what he wants even if he loses the director battle. The contest, if it isn't settled first, is likely to go down in October, which is when P&G is expected to hold its next annual meeting. Nevertheless, if he wins expect that the election will mean more than just the addition of one more director, Peltz, on the company's eleven-person board. It will be considered a "catalyst" for change, a message from shareholders that they would like to see a significant change in the months to come.
The insurgent investor put out a statement arguing that there are major disruptions to the entire consumer packaged goods industry, including changes in technology and consumer behavior. Peltz added that he's not advocating for a breakup of the company. However, Procter & Gamble is a classic example of a large confusing conglomerate company that has hidden value. As a result, it is likely that Peltz, as a director, could advocate for a spinoff of at least two units, its Beauty division and its so-called Over-the-Counter business, as part of an effort to simplify the business. And consider that in his statement, Peltz suggested that the company suffers from "excessive cost and bureaucracy," adding that it also has an "overly complex organizational structure" and "insular culture." A couple of spinoffs don't count as a full break up, yet they would help P&G move in the direction of simplifying its overly complex organizational structure.
It is also possible that Peltz could push P&G to make acquisitions as part of his effort to improve the brand mix at the conglomerate. In an interview with CNBC, Peltz said that P&G suffers from "suffocating bureaucracy" and that all its brands together start to get commoditized, losing market share. However, he added that the way the company could counter that problem is by "either incubating new brands, building new brands, acquiring new brands," which he sees as an approach that could help the conglomerate grow and take market share back. [Procter & Gamble] is structured improperly to do that," he said.
In any event support from institutional investors, particularly long-term index funds and pension funds will be key. Trian only owns 1.44% of Procter & Gamble, a $3.3 billion stake, the activist fund's largest investment in any one company ever. The activist fund has a $12.7 billion in assets under management, with callable commitments of another $900 million.
However, Trian's history suggests that many institutional investors will support him. Peltz is that rare breed of insurgent known as an "operational activist" because his track record as an operator sets him apart from "financial activists," investors from a hedge fund background who focus on urging capital distributions or full break ups of businesses.
Both sides will be vying for the support of the large index funds that own a significant stake at Procter & Gamble. In particular, Vanguard and BlackRock own 7% and 4.4% respectively. Their support could make or break Peltz's effort. The operational activist narrowly lost his director-election at DuPont because he didn't get the backing of three large passive investors.
However, Peltz also made comments that could placate some long-term investors who are not seeking significant changes at the company.
Peltz said he's not pushing for a break up of the whole business or the ouster of the company's CEO, David Taylor. He also said he's not seeking to replace directors, noting that if he is elected, he would want to see the director that was ousted re-installed on the board. Also, Peltz said he's not seeking to cut pension benefits or research & development or marketing expenses. Companies often argue that activists are seeking to cut out R&D as part of their efforts to undercut activist investor insurgencies.
At Procter & Gamble, Peltz's suggestion that he doesn't want to oust Taylor or reduce R&D should bolster his support among big index funds, who likely want to see a modicum of share-price improvement change but not a massive transformation.
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