It has been a tough year for Procter & Gamble (NYSE:PG). Shares of the consumer products giant are down 10% year-to-date. The company has struggled against a number of headwinds like the strong U.S. dollar, which has dampened its large international business. More importantly, P&G is seeing growth grind to a halt, even organically, as it reaches saturation in North America, and has faced challenges penetrating emerging markets.
These factors have prompted investors to opt for smaller, more nimble competitors in the consumer staples sector. P&G needed something to give its business a shot in the arm, to prove to investors that the company can still grow. The ultimate result: P&G is set to close a major deal to sell $12 billion of its business.
A huge deal in the making
Underlying performance at P&G has been weak for some time now. Total sales are down 4% for the first nine months of the current fiscal year. Operating profit is down 6% for the same period.
Though currency headwinds are partially responsible, there are more fundamental factors at play -- even excluding foreign exchange effects, revenue was up just 1% last quarter.
P&G needs a significant change to move the needle. And that change is likely here, as reports indicate that the company will be parting with up to three major brands to the tune of $12 billion. Coty (NYSE:COTY), which makes products like Marc Jacobs and Calvin Klein fragrances, is the expected buyer.
Coty has won an auction that will allow it to take over the fragrance business with brands like Dolce & Gabbana, Gucci, and Hugo Boss. Also included in the sale is cosmetics, including the Cover Girl and Max Factor brands, and the Wella hair-care business.
Good move for P&G
So was this really the right move? First and foremost, the divested businesses are not growing much. The beauty, hair, and personal care segment is one of the largest at P&G, representing 23% of total sales for the most recent quarter.
This segment also saw revenue fall 11% year-over-year during the quarter, or 3% excluding currency effects. In fact, beauty, hair, and personal care was the only business to see a decline in organic sales last quarter.
In response, P&G is shifting focus into higher-growth areas. This is right in-line with broader management plan to divest as many as half of its slow-growth businesses during the next two years. The deal with Coty follows a similar divestiture last year when P&G sold the Duracell brand to Berkshire Hathaway for $4.7 billion.
P&G can now invest in products it sees as offering the best pricing and volume opportunities. Specifically, the company is seeing great success in diapers. Pampers, its largest brand, has grown at a 5% pace during the past three years.
Going forward, P&G is counting on innovative products like the Swaddlers premium-priced line to drive growth. With this cash windfall, this is the kind of investment that P&G can make across its portfolio.
A long journey to become the "new" Procter & Gamble
Since 2008, P&G has divested or spun off nine different categories, not including the most recent deal with Coty. The company has exited bleach, coffee, batteries, pharmaceuticals, and more.
This multi-year path to reinvigorate the business includes plans to exit about 100 brands before the portfolio transformation is complete, and management notes these businesses were collectively declining at about a low single-digit rate for the past three years.
As management stated at the Deutsche Bank Global Consumer Conference, the businesses involved do not fully leverage P&G's massive scale. Once this process is over, the "new" P&G will consist of roughly 65 brands across just seven categories, with a geographic focus on the premier emerging markets.
The businesses P&G sold are profitable but stagnant. It makes sense for management to steer investment toward its critical areas of focus. With an additional $12 billion in its coffers, it can do just that.