In February, billionaire investor Nelson Peltz revealed that he had purchased a $3.5 billion stake in Procter & Gamble Co (NYSE:PG) through his investment firm, Trian Partners. Wall Street suspected that the purchase was part of a grand strategy even though Mr. Peltz didn’t offer any proposals on making changes in the company. Market analysts surmised that the billionaire investor was bidding his time – now it seems that Peltz indeed had plans to make some changes at Procter & Gamble after all.

Here are the salient points of the proxy fight with PG

On Monday July 17, Peltz through his firm set the stage for what might end up being a massive proxy showdown after he had asked for a seat on the board of Procter and Gamble. The consumer goods giant officially declined to give him a seat on the board. Mr. Peltz in a regulatory filing observed that Procter and Gamble needs to shake up its organization and operations in order to maximize shareholder value.

Part of the proxy material submits that “Mr. Peltz would seek to help the company increase sales and profits, regain lost market share, and address the company’s structure and culture, and we believe that he can contribute far more value operating from within the company’s boardroom than by merely advising the company from the outside,”

In the defense of Trian Fund Management, Procter and Gamble has actually underperformed the market even though it still manages to post decent gains. The chart below shows how Procter and Gamble has fared in the last five years in comparison to how the general market represented by the S&P 500 has fared. From the chart, you'll observe that the S&P 500 has booked gains of 81.84%in the last five years. In contrast, Procter and Gamble has only managed to score 35.01% gains.

However, the management of Procter and Gamble submits that it is already doing a great job in maximizing shareholder value. To be fair, the firm had embarked on a massive cost-cutting initiative in 2014 to divest about 100 brands and merge operations across other brands. Procter and Gamble notes that it has already cut about $10B in costs since 2012 and it has mapped out strategy to trim expenses by another $13 billion going forward.

The firm further notes that its current cost-cutting initiatives are will ultimately help shareholders to realize bigger returns. In a statement, Procter and Gamble maintained that its board was “confident that the changes being made are producing results, and expresses complete support for the company’s strategy, plans, and management.”

Procter and Gamble might never remain the same

Josh Wasserman, in a Stern Options market commentary notes that "activist investors have become the shakers and movers of Wall Street – we have seen them successfully forced corporate giants to review their operations and strategies." In the last one year, Jana Partners took on Whole Foods Market, forcing the retailer to sell itself to Amazon after revamping the board. Yahoo spun off its core business after a serious proxy fight with Starboard value. Third Point engaged Nestle in a massive fight and we can still remember how Carl Icahn stalled the leveraged buyout of Dell.

In some cases, activist investors get their ways – the company puts them on the board or changes its corporate strategy. In other instances, the company is able to thwart the efforts of the activist investors. However, other shareholders on Wall Street mostly tend to take the side of activist investors; hence, Procter and Gamble will need to present a superior argument that it is doing enough to maximize shareholder value. Without a superior argument from the management, Procter & Gamble will never remain the same irrespective of whether Mr. Peltz gets a seat on the board or not.

By Boris Dzhingarov

© 2017 Copyright Boris Dzhingarov - All Rights Reserved

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