Without wishing to curtail your suggestions for areas of the Trian Partners – Procter & Gamble proxy fight that we should follow (do send them), here are some early thoughts on what we’ll be looking out for. Personally, the first surprise came in our poll (above) that discounted a settlement.
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- What is Trian’s plan? The activist says it doesn’t want to remove CEO David Taylor, breakup the company, take on leverage, cut capex or research and development spending or even change the composition of the board beyond adding Peltz (it says it will re-nominate the defeated director if successful). An “introductory” 23-slide presentation suggests organic sales growth and management bureaucracy are the big challenges. How much will Trian say about its solutions during the campaign?
- Is change justified? This is the question perennially asked of proxy contests by Institutional Shareholder Services’ special situations team. Trian’s campaign website, revitalizepg.com, suggests total shareholder return has lagged the S&P 500 Index, the consumer staples index and the company’s peers over one-, two-, three-, four-, five- and ten-year periods (the only exception being the consumer staples index over the past twelve months). P&G says “Over the past two years, P&G has accomplished the most significant portfolio transformation in its history, having divested, discontinued, or consolidated more than 100 brands and simplified its product portfolio from 16 to 10 categories,” as well as trumpeting recent cost reductions.
- How does the shareholder base feel about management? The average level of shareholder support at the 2016 annual meeting was 95% for directors and 94% for executive compensation, below the 99.9% and 96% respectively for all companies, according to Activist Insight Vulnerability. Besides Trian, there are at least 12 shareholders with a history of activism on the register, suggesting high expectations for a strategic shift.
- How does the retail component factor into the fight? Only 62% of P&G’s shareholder base is made up of institutional investors, again according to Activist Insight Vulnerability. Those are the most likely to vote and therefore the key battleground. But does Trian’s stated intention to leave pensions alone placate retail or will they turn out for management. As Andy Freedman of Olshan Frome Wolosky said in our Half-Year Review, activists are optimistic about retail becoming more easily swayed. At Arconic, an activist bombarded shareholders with video players, while Trian’s last fight, at DuPont, saw both sides taking out Wall Street Journal adverts. Social media is now more in vogue and there could be further advances in this area.
- How much does this cost? Year-to-date, activists anticipated that they would spend around $1.3 million on their proxy fights, compared to $2.8 million for issuers, according to an Activist Insight analysis of regulatory filings. That likely understates the total spending considerably. General Motors said it expected to spend around $15 million for a fairly pedestrian fight against Greenlight Capital earlier this year. $30 million would be a conservative estimate for Trian and Procter & Gamble combined, but the real cost could be significantly higher.
- How personal will this get? Trian has said it is not targeting Taylor, just as it did not call for DuPont CEO Ellen Kullman to quit during its fight in 2015. Yet the activist did attack Kullman’s selling of shares via an automatic trading plan. Few CEOs survive an activist campaign with their authority intact – indeed, Kullman departed after the next earnings release. For Procter & Gamble’s part, it could point out that the admittedly energetic Peltz is older than all of its current directors at 75 and three years beyond its board’s retirement age (it makes allowance for “exceptional circumstances”). An article on this very topic recently appeared on a news service covering Cincinnati, where P&G is headquartered.
- MAGA! The biggest wildcard of all, does the president’s opposition to offshoring have an impact on this proxy fight? Peltz has spoken warmly of Donald Trump in the past so a direct reference might be unlikely, but economic policy is not the only thing to come out of Washington D.C. that corporations are watching these days.
Article by Activist Insight