Weekly Personal Care Review: Procter & Gamble

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Procter & Gamble

Global consumer processed goods powerhouse Procter & Gamble (NYSE: PG) continued with its brand consolidation program during the week ended March 20th. Following reports of the company’s plans to divest some of its beauty brands (Read: P&G Mulling Sale or IPO of Some of Its Beauty Brands), Paris-based Interparfums S.A. announced that it has agreed to purchase P&G’s Rochas brand for $108 million. [1]

Remarkably, during the same week the company also announced plans to build a $300 million R&D center for its beauty business in Mason, Michigan. [2] The combination of cutting back its beauty business alongside R&D expansion raises interesting questions regarding P&G’s long term strategy.

P&G’s shares gained 4% during the week ended March 20th, including a 2% jump following the announcement of the sale of the Rochas brand. In comparison, the Dow Jones U.S. Personal Products Index gained 2% Monday through Friday, while the broader S&P 500 climbed by 3% over the week.

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

See our complete analysis of Procter & Gamble here

Brand Shedding Continues Slowly but Steadily

As part of its drive to divest or discontinue 100 non-core brands, last week Procter & Gamble sold its Rochas fashion and fragrance brand to Paris-based Interparfums. The transaction includes all fashion and cosmetics brand names and registered trademarks for Rochas, including the Femme, Madame, and Eau de Rochas brands. The purchase price of $108 million will be payable in cash and the transaction is expected to be closed in the first half of calendar 2015, subject to customary closing conditions.

It is not clear how much revenues the Rochas brand contributed to P&G’s beauty business. However, from the transaction size, it can be safely assumed that Rochas’ revenue share was inconsequential. According to a recent report, the mean revenue multiple for M&A transactions in the fourth quarter of 2014 was 1.8x. [3] Based on this revenue multiple, Rochas’ revenue can be assumed to be about $200 million. In comparison, P&G’s Beauty segment had revenues of $19.7 billion in 2014 and the Fragrances sub-segment had revenues of $5 billion. This implies that Rochas contributed a mere 1% to the Beauty segment, and 4% to the Fragrances sub-segment.

It is important to note that P&G estimates the total revenue share of the brands to be sold at 14% (Read: P&G Expects Brand Consolidation to be Over by Summer). However, so far, the company has sold only one major brand, Duracell. Given that P&G expects the brand consolidation program to be mostly over by this summer, it follows that major divestments may be lined up for the next few months. Bloomberg recently reported that major brands like SK-II skin care, Wella salon professional, CoverGirl makeup, Herbal Essences shampoo and others are under consideration as potential divestment candidates. [4] However, P&G has rubbished these reports as “pure speculation”. [5]

New R&D Center Planned in U.S.

Just two days before announcing the sale of its Rochas beauty brand, P&G announced its plans to build a $300 million R&D facility in its Mason, Michigan campus in U.S. The company will transfer thousands of employees and contractors from two other facilities, namely, the Sharon Woods Innovation Center and the Blue Ash site, to the newly constructed Beauty Innovation Center, beginning 2018. Construction on the new 500,000 square feet facility will commence this April, adding to P&G’s existing 1.5 million square feet facility in Mason.

The planned R&D facility provides an important indication of Procter & Gamble’s path post completion of the brand consolidation program. The overall beauty business is P&G’s least profitable segment and has been struggling to grow over the last few years. This led to speculation that P&G will cut back on its beauty business significantly as part of the brand consolidation program. [4] However, since P&G is investing a considerable amount in R&D for its beauty business, it can be safely deduced that the company will hold on to at least some of its major beauty brands. Therefore, investors will keenly watch which brands P&G decides to retain and which brands get the axe.

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Notes:
  1. Interparfums S.A., entered into an agreement to acquire the Rochas brand, Wall Street Transcript, March 19, 2015 []
  2. P&G to build massive R&D center in Mason, Cincinnati Business Courier, March 17, 2015 []
  3. Beauty Care M&A Q4 2014 Report, Intrepid Investment Bankers, January 20, 2015 []
  4. Procter & Gamble to Explore Sale or IPO of Beauty Brands, Bloomberg, March 16, 2015 [] []
  5. Ugly choices ahead for P&G’s beauty business?, Cincinnati.com, March 21, 2015 []