Expect More Break-Up Calls For P&G (PG, CL, KMB, CHD, BRK-A, BLK, STT)

The calls for Procter & Gamble Co. (NYSE: PG) to unlock shareholder value are growing. This is a classic defensive stock with a big dividend, but if you eliminate the great recession this stock has been in a trading range of just under $60 to about $68 for quite some time.  Breaking up a company for mere short-term gains is often a risky proposition.  Still, it has a $172 billion market capitalization for the equity value and that makes P&G larger than all other U.S. public personal consumer products outfits combined.

The calls for a break-up are growing and we have heard notes from Bloomberg, Dow Jones, and even a brief mention from Jim Cramer on CNBC.  With at least 3 calls coming for a break-up, the reality is that more calls for the same should just be expected.  The exception here is that activist investors are going to be very limited here.  How much can a group of investors really influence a $172 billion company? Even though Warren Buffett via Berkshire Hathaway Inc. (NYSE: BRK-A) has cut his stake to 73.2 million shares (2.6% stake) from 96.3 million shares, that stake is worth almost $4.6 billion as of today.  Keep in mind that entities and funds under the following have significant stakes as well:

• Vanguard Group has 122.5+ million shares, a 4.47% stake;
• State Street Corporation (NYSE: STT) has 114.3+ million shares, a 4.17% stake;
• BlackRock, Inc. (NYSE: BLK) has 71.9+ million shares; a 2.62% stake.

Even if you tally up Berkshire, State Street, Vanguard, and BlackRock you still have less than 14% of this behemoth as far as shares are concerned.  Forcing a breakup here is just going to be a tough if not impossible situation unless P&G decides on its own that this is the best strategy.  The company announced a cost-cutting restructuring plan earlier this year and that may be all that investors should expect today.

Tally up the P&G domestic competitors of true defensive every-day consumer products: Kimberly-Clark Corporation (NYSE: KMB) is worth some $32 billion; Colgate-Palmolive Co. (NYSE: CL) is worth some $47.8 billion; and Church & Dwight Co. Inc. (NYSE: CHD) is worth $7.5 billion.  Those three companies are worth $87.3 billion in combined value before you get into some of the other loosely related publicly traded consumer products entities.

Another condition to consider is that P&G has a massive debt load as well.  That would make any such break-up a tricky situation with creditors who may want to have exposure to certain sides of a business rather than simply being divvied up on a pro rata basis among entities which would have some stronger and weaker operations than this company as a whole. P&G lists the following long-term liabilities outside of its $26.9 billion in short-term liabilities: $21.3 billion in long-term debt; $9.1 billion in ‘other’ liabilities, and almost $11.3 billion in Deferred Long Term Liability Charges.

P&G bought Gillette in a $57 billion deal which was very controversial at the time.  It seems unfathomable that P&G just bought that company so that it could break itself apart less than a decade later.  Either way, expect the calls to grow for a breakup even if forcing a breakup may be close to impossible.

JON C. OGG