Procter & Gamble Co.’s planned portfolio restructuring, largely met with optimism from the investment community, stirs interest from other consumer health care product firms as another potential target for product acquisitions.

During the firm’s fiscal 2014 fourth-quarter earnings call Aug. 1, CEO A.G. Lafley said P&G will halve the number of brands in its portfolio over the next two years to promote efficiencies and focus on “consumer-preferred” offerings.

For Prestige Brands Holdings Inc., P&G’s restructuring adds more products to the mix of potential acquisition targets.

“Across all of these portfolios, there are clearly opportunities for Prestige and it makes sense,” President and CEO Matthew Mannelly said during Tarrytown, N.Y.-based Prestige Brands’ fiscal 2015 first-quarter earnings call Aug. 7.

Mannelly pointed out with Bayer AG’s acquisition of Merck & Co. Inc.’s consumer health business pending, “when you combine that portfolio, there's potentially some opportunities for rationalization and it's primarily North America focused” ([A#05140512005]).

“I think right now the market [for acquisitions] is the most prolific it's been in the last five years that I've been here. … There is likely as has been stated by some companies, to be portfolio rationalizations from some of the existing transactions in the next 12 months to 24 months.”

“We're a very logical player for some of these acquisitions and a logical choice since we're the number one independent OTC company in the United States,” he said, adding, “we are ready and able to capitalize on new market opportunities, we have been and will continue to be very aggressive and disciplined in terms of M&A.”

‘Sea Change’ In Consumer Health M&A

Mannelly said that like GlaxoSmithKline PLC’s divestment of a portion of its consumer health portfolio in 2011 and 2012, P&G’s restructuring announcement “may have set the stage for other similar announcements from other large players as well, and we've seen that happen in the past” ([A#05130624002]).

“When you step back and look at this in aggregate, it says that there's a real sea change going on right now,” he observed.

And for Prestige’s interest, “it's not just the big pharma companies,” Mannelly said. “There are also opportunities in terms of family-owned and private equity [which] we've seen in the private equity market has heated up quite a bit in the last 12 months to 24 months.”

P&G provided limited detail on the brands it aims to cut. Lafley noted the targeted 90 to 100 brands represent less than 10% of the firm’s total sales and less than 5% of its annual profit.

In an email, P&G Director of Corporate Communications Paul Fox said the timeline for action on specific properties “will be driven by the need to create the maximum value from these 90 to 100 brands.”

Fox said “these will be strategic choices, not driven by sales. We want to focus [going forward] on brands that are in structurally attractive businesses, where we can leverage our core capabilities and where we have the greatest opportunity to win.”

Analysts Optimistic With Questions

Questions remain as to how P&G’s restructuring will be carried out and how effective it will be.

In an Aug. 4 note, UBS analyst Stephen Powers observes, “clearly there is much enthusiasm for this plan.”

While the announcement helped drive P&G stock up more than 200 basis points to close the day at $79.65, a lasting boost to the firm’s value depends on execution of its restructuring.

“To what degree this strategy proves to be a positive rests on several unanswered questions, including: which brands will be divested, when, for how much, and how much management attention will be taken away from the core business while these transactions are executed,” Powers said.

“And ultimately, will the removal of [roughly] $8 billion from an $80 billion plus portfolio really provide the incremental focus and improvement that P&G needs?” he added.

Lafley said during P&G’s earnings call that the firm will retain core brands including 23 with sales of $1 billion to $10 billion and 14 that bring in sales of $ 500 million to $1 billion, while the rest drive sales of $100 million to $500 million ([A#05140804014]).

P&G already is shedding weight for a sleeker structure and sharper strategic focus, Fox noted.

So far in 2014, the firm has entered into deals to sell the bulk of its pet-food business to Mars Inc., and personalized health care operator MDVIP to previous owner Summit Partners. P&G also unloaded its PertPlus shampoo business in Latin America to [Henkel AG & Co. KGAA] in June and announced plans in February to divest its worldwide bleach business.

In an Aug. 6 blog post, Euromonitor’s Ian Bell said P&G’s decision to divest upwards of 100 more brands “falls in line with the company’s mantra of efficiency and innovation.”

Additionally, it provides answers to three challenges the firm faces currently, according to Bell, Euromonitor’s global head of home care, tissue and hygiene research.

By jettisoning non-core brands, P&G “is attempting to stay relevant in developed economies where markets are often saturated,” Bell said. Further, the move positions the company to compete more effectively in emerging markets, such as China, “where in some key categories I think they’ve fallen by the wayside a little.” Finally, P&G will be in better shape to take on “more competitive local players moving into space that P&G might normally think of as their own,” the analyst suggested.

Hilliard Lyons analyst Jeffrey Thomison had a similarly positive outlook on the strategy in an Aug. 5 note. “We support this initiative … due to the possibilities created by allocating future capital to areas such as reinvestment in existing operations (growth of existing brands), acquisition, and shareholder-friendly actions such as dividend increases and share repurchases.”

Meanwhile, P&G continues to cut costs at a pace ahead of schedule in its bid to achieve $10 billion in savings by 2016.

Powers was encouraged by P&G’s progress in the initiative in fiscal 2014. “This productivity has been and will continue to be a necessary tool in the company’s arsenal if it hopes to offset top-line pressures and embark on what we believe will be an expensive supply restructure.”

P&G indicated it is undertaking a “complete redesign” of its end-to-end supply chain, with the goal of bringing 80% of its business within 24 hours of store shelves and shoppers ([A#02140623007]).

Powers expects the restructuring to be expensive – in excess of $1 billion. He quoted Lafley’s remark during the Aug. 1 call: “I don’t want to go out and spend $1 billion round numbers on totally redoing the sourcing and supply chain in North America and do it for the wrong business shape and size.”

[Editor’s note: Each week, “The Pink Sheet” DAILY features a story contributed by “The Tan Sheet,” highlighting a current topic in the consumer medicines or nutritional supplements sectors.]

P&G Portfolio Reduction Stirs Pot Of Consumer Health Acquisition Targets

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