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Trian Builds Stake in Procter & Gamble -- 3rd Update

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02/15/2017 | 02:37am CEST
By David Benoit and Sharon Terlep 

One of the biggest activist investors has built up a more than $3 billion stake in Procter & Gamble Co., adding urgency to the consumer-product giant's efforts to turn around its business and boost its stock price.

Trian Fund Management LP, which in previous years has targeted companies like PepsiCo Inc. and DuPont Co., disclosed Tuesday it had bought shares in P&G, which has a market value of $225 billion. Trian's bet, at more than $3 billion, according to a person familiar with the matter, is its largest investment ever. It's unclear what changes Trian, which is known for publishing detailed research reports on its investment targets, will seek at the maker of Tide detergent, Gillette razors and Pampers diapers.

"P&G welcomes investment in our company," the Cincinnati company said, after The Wall Street Journal first reported on Trian's investment Tuesday. Shares of the company, which have lagged behind the broader market for the past year, jumped 3% in late trading to $90.40.

P&G has been slashing costs and shedding dozens of brands to refocus on its biggest businesses. But it has struggled to boost sales growth as it battles a sluggish global economy, price pressures and competition from internet upstarts like the Dollar Shave Club.

Historically, Trian has focused on companies it believes need tighter focus on core operations, as well as on cutting costs and management bureaucracy. As with other activists, it also is known for advocating for asset sales or breakups. Trian sometimes works quietly from inside the boardroom and at other times wages public battles for influence.

Trian didn't speak with P&G executives about its investment before disclosing it publicly, people familiar with the matter said.

This isn't the first time P&G has faced an activist. In 2012, William Ackman's Pershing Square Capital Management LP invested in the company and called for a CEO change amid slumping profits. A year later, Robert McDonald was replaced by his old boss, A.G. Lafley, who remained chairman until last year. Company veteran David Taylor is now chairman and CEO.

Mr. Taylor, who took over in November 2015, has opted against launching new brands or buying a hot startup, instead relying on P&G's traditional fundamentals: selling to the masses by way of big retailers on the strength of meticulously collected consumer research; a massive research-and-development operation; and the world's biggest advertising budget.

"I understand the desire for faster growth and for a single-minded short-term objective, but we've seen this movie before, and frankly, we don't want to live the sequel," Mr. Taylor said at a meeting with analysts in November after his first year at the helm.

The company's closely watched organic sales growth, which excludes acquisitions or divestments as well as currency swings, has been stuck between 1% and 3% in recent years. In January, P&G increased its target for the year ending in June to between 2% and 3% -- though that is still well below prerecession levels.

Bernstein analyst Ali Dibadj has long advocated a breakup of P&G. He said P&G's resistance to change may prompt Trian to take a more active role. "We have always tried to keep P&G's feet to the fire as we don't think it's living up to its potential," he said. "We can imagine Trian sees the same thing and will do the same."

P&G shares have gained 5.7% this year including dividends, outpacing the S&P 500's 4.2% return, but the share's price has trailed the benchmark over the past one-year and three-year periods.

P&G fared better than many of its rivals in the second half of 2016, capturing market share in many categories. Analysts say the environment is tough for consumer-staples sellers, also because of macroeconomic factors like currency volatility. Several big research firms have downgraded P&G shares, including Goldman Sachs Group Inc., which put a sell rating on the company in January.

P&G, General Electric Co. and some other American corporations are rushing to shed underperforming divisions and slim down after years of bulking up through acquisitions outside their core expertise. The change of heart among top executives was seen as an admission that their companies had grown too big and bloated to manage effectively, which caused their stock prices to languish in recent years. It also came as activist investors used their war chests to pressure boards to move more quickly.

P&G spent $80 billion over two decades scooping up brands including Gillette razors, Duracell batteries and Iams pet food, only to end up selling some of them to focus on boosting sales of Tide, Pampers and other mainstays. In October, P&G completed the $11.6 billion sale of dozens of beauty brands, including CoverGirl makeup and Clairol hair dye, to Coty Inc., which included the transfer of about 10,000 P&G employees.

The activist world has been in guessing mode on the new Trian position, particularly since co-founder Nelson Peltz said in December that he and his partners had started buying a new stock. At that time, Mr. Peltz told CNBC that he hoped to talk to the board and management before the investment became public, as the firm has tried to distance itself from bare-knuckled activism and position itself as a constructive, if opinionated, shareholder.

Trian didn't reveal a new investment in all of 2016, focusing instead on its portfolio companies, after making three new investments in 2015. One of them was then its biggest ever, a $2.2 billion stake in General Electric Co.

But it was also ramping up for this new bet by fundraising and selling some other stakes. During 2016, it sold a $1.8 billion investment in PepsiCo, after a three-year campaign that included a bid to break up the soda and snack maker, and a $383 million position in money-manager Legg Mason Inc., which marked one of the few times in which Trian has helped remove a chief executive.

Trian raised a specific fund for the P&G position in recent months, tapping large investment pools like sovereign-wealth funds and pension funds, people familiar with the matter have said.

Trian on Tuesday disclosed a P&G stake of $539 million when it released its portfolio as of the end of December. The investment fund has continued buying throughout the new year and the stake has risen to more than $3 billion, the people said.

Write to David Benoit at [email protected] and Sharon Terlep at [email protected]

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