P&G Mulling Sale or IPO of Some of Its Beauty Brands

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PG: Procter & Gamble logo
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Procter & Gamble

Global consumer products powerhouse Procter & Gamble (NYSE: PG) is contemplating the sale or IPO of some of its beauty brands, according to a recent report by Bloomberg. [1] The move is part of P&G’s ambitious plan to sell up to 100 non-core brands in a bid to revive growth and improve profitability. If the sale or IPO of the so far unidentified group of beauty brands is carried out, it could be P&G’s biggest step forward in the brand consolidation program since the sale of the Duracell brand. However, company insiders have stated that details of the plan have not been finalized yet and P&G may still decide not to follow through with the plan.

Investors reacted to the development enthusiastically, as P&G’s shares rose 2.1% following the announcement. [2]

We have a price estimate of $83 for Procter & Gamble, which is nearly the same as its current market price.

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See our complete analysis of Procter & Gamble here

Declining Revenues, Low Margins

Procter & Gamble’s Beauty division had revenues of $19.5 billion in fiscal 2014, which accounted for 24% of the company’s total revenues. Its beauty business includes marquee billion dollar skin care brands like Olay, SKII, and Covergirl, and hair care products like Heads & Shoulders and Herbal Essence, among others. Despite the presence of such globally renowned brands, revenues from the Beauty division suffered a contraction of 2% in fiscal 2013 as well as 2014. According to our estimates, it achieved an EBITDA margin of 20.4% in 2014, which was the lowest among all divisions of P&G.

The above illustrates that the poor performance of the Beauty business is dragging down P&G’s overall growth and profitability. The Beauty division is P&G’s third largest division, so revenue deceleration and low margins in this division has a notable impact on the performance of the entire company. The extent of poor performance of the beauty business is such that P&G’s CEO A.G. Lafley himself called the beauty industry as “the great industry of promises made and never kept”. [3]

Hence, the company’s contemplation of cutting down on this under-performing business makes sense. P&G has not yet decided which brands are going to get the axe, although speculations have been ripe since late last year that the company is exploring options for divesting the Wella hair care unit. [4]

About 65 Brands Set To Be Divested Over Next Few Months

Mr. Lafley stated in the Consumer Analyst Group of New York conference call that the company intends to be largely through with the brand consolidation program by the end of summer (Read: P&G Expects Brand Consolidation to be Over by Summer). Of the 100 brands planned to be divested, the company has already identified 35 brands for divestment. Thus, plans for divestment for most of the remaining 65 unidentified brands are likely to be announced over the next few months. Post consolidation, the company will own only 65 category-leading brands across 10 product categories.

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Notes:
  1. Procter & Gamble to Explore Sale or IPO of Beauty Brands, Bloomberg, March 16, 2015 []
  2. P&G’s Possible Beauty-Unit Split Shows Lapses in Tough Industry, Bloomberg, March 17, 2015 []
  3. P&G Learns That Beauty Is Ugly, Bloomberg View, March 16, 2015 []
  4. P&G exploring sale of $7 billion Wella hair care unit, Reuters, November 28, 2014 []