Will Nelson Peltz’s Procter & Gamble(PG) Stake Lead To Spinoffs?

Nelson Peltz is legendary for successfully pushing for structural change at large companies.  This has often resulted in spinoffs of disparate divisions. Last week, Peltz’s investment vehicle, Trian Fund Management, disclosed a $3.5 billion stake in Procter & Gamble(PG). Peltz steps into the shoes of Bill Ackman, who several years ago took an activist position in P&G, only to exit two years later without particularly impressive results.  We reported at the time that Doug Kass felt another activist would join Ackman and push for one or more spinoffs. That did not happen.

Under CEO David Taylor, Procter & Gamble has made impressive strides. Though the company originally planned a spinoff of its Duracell business in 2014, it opted instead for a cash-rich split which gave the business to Warren Buffett’s Berkshire Hathaway(BRKB) for $4.7 billion in P&G stock it held. It also spun off it specialty beauty business in a 2016 Reverse Morris Trust transaction to Coty(COTY) following an exchange offer that allowed shareholders to choose Procter & Gamble or Coty shares.

Breakingviews suggests that Gillette’s shaving business may be a spinoff candidate

Breaking up the company may be one option. Although Mr. Peltz unsuccessfully pushed such an idea at Pepsi, analysts from Bernstein already have sent letters to Mr. Taylor and the board supporting the idea. Gillette could be an area of focus for Mr. Peltz. Procter & Gamble paid more than $50 billion for it in 2005, but the razor operation has come under increasing pressure from start-ups like Harry’s that offer cheaper alternatives through subscription services that cater to younger consumers. Unilever recently bought a Gillette rival, the Dollar Shave Club, giving it a stronger backer.

Fortune speculates more broadly, citing the company’s large number of operating units

Since P&G is already slashing costs and streamlining its portfolio, it isn’t a fat, flailing target where the solutions are obvious. So what improvements will Peltz demand, if any? Peltz isn’t commenting on his plans for P&G. Even after all its rationalization, P&G still has ten major product groups that it calls core, most of which, like beauty and homecare, are barely plodding forward, while others such as healthcare are expanding briskly. Peltz may argue that splitting P&G into separate businesses, each specializing in a single category, could be the key to unlocking value.

Bloomberg Gadfly suggests that it might follow Energizer’s(ENR) lead in its 2015 spinoff of Edgewell Personal Care(EPC)

Peltz might also push P&G to split itself in two, separating its household-products business from its personal-care business, much as Energizer did with its personal-care business.

Alliance Bernstein, which has been advocating a breakup for years, reckons P&G doesn’t get enough benefit from the sheer scale of its operations. A substantial breakup would result in bigger returns compared to the smaller divestitures P&G has made so far, according to Bernstein, which has pegged the upside of a breakup at around 13 percent.

While it is not clear what Peltz’s plans are, it is clear that he has a plan. Having taken a $3.5 billion stake, he is unlikely to sit on the sidelines passively. We suspect that we will hear, sooner, rather than later, what he intends to push for.

Disclosure: The author holds shares in BRKB