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Positive Gamble

24 October 2014 By Kevin Allison

Procter & Gamble’s Duracell jolt highlights the value of focus at the sprawling $225 billion consumer products giant. Investors were energized by the detergent-to-diapers behemoth’s plan to offload its batteries arm. Spinning off copper tops won’t create much value on its own. But it’s a solid plank in boss A.G. Lafley’s campaign to shed underperforming brands and simplify an unwieldy business.

P&G’s shares rose 3 percent on news of the battery exit, which will probably take the form of a spinoff to shareholders. The resulting $7 billion lift to P&G’s market value handily matches the price Gillette paid for the top U.S. battery brand in 1996. P&G inherited Duracell when it bought Gillette nine years later.

Duracell is unlikely to be worth that much as a stand-alone company. Analysts at Bernstein estimate the battery unit makes earnings before interest, tax, depreciation and amortization of about $580 million – or 3 percent of P&G’s forecast EBITDA for the fiscal year ending next June, according to estimates tracked by Thomson Reuters. On an enterprise multiple of seven times EBITDA – a steep discount to P&G’s 13 times EV/EBITDA, to reflect the fact that batteries are a mature, commodity product with few growth prospects – the business would be worth $4 billion.

The spinoff may be more valuable for the signal it telegraphs. Coming less than three months after Lafley announced a plan to cull up to 100 lackluster brands, it suggests the P&G chief is working with appropriate urgency and willing to consider large divestitures.

It will take time for Lafley to show that narrowing P&G’s focus to a few dozen core brands can revive sluggish sales. Announcing its quarterly results on Friday, P&G said it still expects only modest single-digit increases in annual revenue growth in 2015. Still, the market’s energetic reaction suggests the lumbering giant is moving in the right direction.


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