Proctor & Gamble Proxy Contest Could Affect Powerful Consumer Brands

Procter & Gamble Proxy Contest Could Affect Powerful Consumer Brands

By Francis J. Gorman

Update: Issues in P&G Proxy Contest Not Resolved

The proxy contest between Procter & Gamble and Nelson Peltz is not over, either literally or on Wall Street. The shareholder vote two weeks ago is so close that the outcome remains uncertain. P&G management declared victory after the vote based on its own “preliminary estimates” of the voting results. Not so fast!

While many institutional and Wall Street firms took sides and voted accordingly, P&G has lots of individual shareholder voters who could swing the result one way or the other. Most of these shares are held in custodial and brokerage accounts at Merrill Lynch, RBC Capital, Legg Mason, and many other retail investment companies. Conventional wisdom has these individual shareholder siding with P&G. As of now, no one knows for sure.

P&G and Peltz were sent only the votes for its side – the blue card votes were sent to P&G and the white card votes were sent to Trian. Neither side knows how many individually-owned shares held in custodial and brokerage accounts were voted for the other side. So, Peltz has not conceded; he’s waiting for the complete vote to be tallied and certified.

That task falls to IVS Associates, a company located in Wilmington DE that provides independent inspectors of the shareholder election and then tabulates and certifies election results – the ultimate in corporate democracy. No one seems to know how long that process will take. Could be months.

Meanwhile, the question whether P&G is maximizing the sales strengths of its 65 trademarked brands continues to be disputed. See P&G brands. As written in the initial blog, Peltz contends that P&G’s low earnings, weak shareholder returns, and loss of market share prove otherwise. P&G used the proceeds of the 2016 sale of trademarked beauty brands to re-purchase shares and thereby increase earnings per share. To make P&G’s business results look better.

Ten days after the shareholder meeting and vote in Cincinnati, P&G announced its First Quarter fiscal year 2018 sales and earnings. Results were not much better. Net sales increased 1% and basic earnings per share increased 6%. P&G management stated the results were “in-line with on-going expectations,” but Peltz maintains that’s the point — management’s expectations are too low. The stock closed yesterday (October 24) at $86.98, down from a $94.00 high on September 20.

Regardless of the final vote tally, the financial and product markets will eventually resolve the contest between Peltz and P&G and determine the health and strength of the trademarks.

Procter & Gamble Proxy Contest Could Affect Powerful Consumer Brands

America’s largest consumer brand company may get a little shake up at its annual stockholders meeting in Cincinnati on Tuesday, October 10, 2017. Procter & Gamble (P&G) is battling activist investor Nelson Peltz over his efforts to be elected to the company’s eleven-member Board of Directors.

Peltz has a history of disrupting companies and their assets after he makes a sizeable investment.

P&G is an ideal candidate for a Peltz investment. P&G has lost some of its power and glamour over the past 10-15 years. The Gillette razor brand has lost market share to newer shaving systems, from Unilever’s Dollar Shave Club to Harry’s Truman Razor which is less expensive and made by a German start-up headquartered in New York. P&G’s market shares in fragrances and beauty products have fallen. In 2016 P&G’s sold Hugo Boss, Cover Girl, Max Factor, and other leading brands to Coty; P&G used the sale proceeds to buy back its own shares. Unilever, L’Oréal, Henkel, Johnson & Johnson, and other global consumer products companies have eaten away at P&G’s consumer brand market dominance.

Peltz claims that P&G has not kept pace with its competitors. Trian Partners, an arm of Peltz’s asset management and hedge fund company, purchased 37 million shares of P&G common stock, about 1.4% of the company’s 2.5 billion shares. Trian Partners has solicited stockholders for proxies and votes to elect Peltz as a director to “help” P&G get back on track as the leading consumer brand company.

Peltz’s charges against P&G’s governance and management are (1) low earnings and weak stockholder returns, (2) loss of market share in all major brand categories and geographic markets, and (3) excessive bureaucracy and costs. P&G’s management responds that Peltz overlooks P&G’s 61 consecutive years of dividends to stockholders and the strong brands and market shares that P&G currently enjoys. P&G points out that in the past, after Peltz gains a board seat, he has pushed and caused companies to spin off business segments or to merge with another company, even a Peltz-controlled company.

But why should P&G be concerned over the election of one director with challenging new ideas? Because Peltz’s proposal is “a camel nose under the tent.” As a director, Peltz would have considerable access and information rights with respect to P&G’s business affairs. Peltz is a threat to the way P&G has conducts business and its plans for the way forward.

What help can Peltz deliver to P&G? He contends that his experience will enable P&G to become more accountable and productive, suggesting the status quo is not acceptable. He will spur creation of new leading brands, something P&G has not accomplished in 20 years. He advocates development of small and local brands, fine for craft beers but not for a company that markets and sells globally. He promises to bring proficiency in mergers and acquisitions (Peltz merged Wendy’s and Arby’s), and P&G might find valuable opportunities with a more aggressive M&A approach. He urges more resources for modern digital marketing, clearly a good step for any consumer, brand-oriented company. Not all Peltz proposals make sense, but his challenging ideas could be beneficial for P&G stockholders. P&G’s board has three former or current CEO’s of large public companies on the board who tend to favor proven practices over innovative proposals.

More than just a new board member is at stake. Ownership and use of consumer brands will be affected. P&G owns an awesome number of consumer brands in grooming (Gillette), oral care (Crest), hair care (Pantene), skin care (Olay), baby care (Pampers), feminine care (Tampax), home care (Dawn, Bounty), cleaning (Tide, Downy), and many more. Peltz likely considers P&G’s consumer brands to be worth more individually than they are in one company. Each of these brands, either individually or paired with other P&G brands, represents a potential sale or spinoff to a newly-created company.