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Thursday, October 29, 2009

P&G Considers Booting Some Brands

Procter & Gamble Co.'s new chief is ready to deal.

Facing mounting pressure to boost sliding sales and recalibrate his company, P&G CEO Robert McDonald is stepping up the hunt for acquisition and divestiture candidates, people close to the company said.

Since assuming the chief executive role in July, Mr. McDonald has been trying to shake-up P&G's slow, process-heavy culture. He has increased scrutiny of P&G brands including Braun small appliances, Iams pet food, Duracell batteries and Pringles potato snacks. While those businesses have long been considered extraneous to P&G's focus on beauty, health and nonfood household staples, Mr. McDonald now is presenting an ultimatum: The leaders of those businesses are on heightened notice to prove their brands' prospects or face a sale.


The division heads have been "pushed to perform better and make the case for more investment," according to one of these people, who said the implication was that those divisions could be divested "if they don't improve results soon."

Meanwhile, P&G has looked at the consumer-products portfolio of Schering-Plough, which is merging with Merck & Co., as well as that of Wyeth, which was just acquired by Pfizer Inc. Another possibility: Beauty-products maker Alberto-Culver Co. It's unclear, however, whether those companies would choose to sell.

P&G is getting closer to a deal to acquire Sara Lee Corp.'s international household-products unit, particularly its Ambi Pur air fresheners, which are popular in Europe, people familiar with the matter said.

Pfizer, Alberto-Culver and Sara Lee all declined to comment.

A P&G spokesman said, "We will continue to closely monitor our brand portfolio."

A deal with Sara Lee could be just the first of many acquisitions under consideration as Mr. McDonald seeks to "aggressively recalibrate and enhance" a company he knows is under-performing, said one of these people.

The world's biggest consumer-products company has struggled more than many of its competitors during this recession. Penny-pinching shoppers increasingly have forgone P&G's premium-priced staples, which can cost more than twice as much as competing brands, especially retailers' private-label goods. Many of P&G's high-end brands, including Tide detergent, Downy fabric softener and Dawn dish soap, have lost market share, pulling down P&G's overall sales and profits.

The Cincinnati-based company is expected to report another quarter of disappointing results on Thursday. Year-to-date, Procter shares are off 7.4%, compared to an 11% gain for the Dow Jones Industrial Average.

Acquiring faster-growing businesses, especially for its household-cleaning and beauty divisions, would allow P&G to buy its way back to sales gains, people close to the company say.

Some analysts insist that improving P&G's mega brands is the only way to turn around overall results. The company has 23 brands that each garner more than $1 billion in annual sales. They account for 69% of P&G's total sales and about 75% of profits, according to estimates by Deutsche Bank analyst Bill Schmitz.

"The health of these brands is crucial to the success of the company overall," hewrote

Last month, Mr. McDonald assured investors that the company was "in touch with reality," and detailed for investors his plans to reignite growth, including price cuts, overseas expansion and creating more low-cost products.

"We know that in fact you punish us for size," Mr. McDonald told investors at a presentation last month. "We're focused on turning that scale into a growth and cost advantage."

Instead of spending several months evaluating where to make changes, as would be the norm at P&G, Mr. McDonald aims to "get more aggressive and do deals that will enhance what the company has," said one person familiar with the matter.

A more aggressive deal-making stance from P&G could shake up the entire consumer-products segment, which is grasping for ways to improve profitability beyond cost cutting. With consumers pulling back on spending, a growing number of these companies are contemplating mergers, say consumer-product bankers.

Duracell—which P&G acquired when it bought Gillette in 2005—has been considered a questionable fit in P&G's cupboard because of its exposure to cheap private-label batteries and fluctuating commodity costs.

P&G has shopped Duracell to potential buyers, but so far no deal has emerged, according to a person close to the matter. Duracell will post about $2.5 billion in sales for the fiscal year ending June 30, according to Sanford Bernstein analyst Ali Dibadj.

Iams, with an estimated $1.8 billion in sales according to Mr. Dibadj, has struggled to improve its profit margins amid fluctuating commodity costs. As one of the most expensive brands in the pet-food aisle, Iams has been a tougher sell in the recession and its market share has slipped.

Braun, with annual sales estimated at $1.3 billion, is also deemed outside of P&G's core businesses. Like Duracell, the brand came along with the acquisition of Gillette.

P&G executives have been examining Braun's small-appliance technologies used in its electric shavers and power toothbrushes to determine whether they can be applied to other products like beauty devices, such as facial cleansers or depilatories.

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