Will Warren Buffett Back Bill Ackman in his $PG Crusade?

PERSHING SQUAREBill Ackman runs Pershing Square, an activist hedge fund that buys significant stakes in companies to influence management decisions. His recent high-profile activist investments have included JC Penney, Family Dollar Stores and Canadian Pacific. His unique activist investment style is often compared with other prominent hedge fund owners.

On July 12th, it was announced that Bill Ackman was acquiring a significant stake in Procter and Gamble. Ackman’s history as an activist suggests that he might be using derivatives to leverage his position. Rumors indicate Ackman’s total position could be equivalent to $2 billion in P&G (NYSE:PG) stock. His activist investments have largely been successful, and his recent success includes Kraft (KFT), Fortune Brands (FBHS), and Family Dollar Stores (FDO). For a list, see Bill Ackman’s Favorite Stocks. At market close Friday, P&G’s stock has risen 6% since news of Ackman’s stake was announced on Thursday.

Taking an activist role in Procter & Gamble could be Ackman’s biggest bet yet. An investment of $2 billion in P&G stock only equates to about 1% of P&G’s market capitalization ($178 billion). This would make Procter and Gamble one of the biggest companies that Ackman has tried to influence (yet). Discontent among P&G’s stakeholders could give more influence to Ackman to force out members of the board, senior management, or influence business decisions. However, given Ackman’s small stake, winning proxy battles still could be very difficult.

There are a few things in Ackman’s favor. P&G has stumbled the last few years; it initially moved slowly in international markets, had difficulty with containing costs, lost market share, and lost investor confidence with its drop in stock price (see below). P&G’s competitors include Johnson and Johnson (NYSE:JNJ), Kimberly-Clark (NYSE:KMB), Colgate-Palmolive (NYSE:CL), Unilever (NYSE:UN) and retailers’ store brands (ie. Wal-Mart’s “Great Value” brand). P&G stock was down 8.17% at the end of June while its competitors had positive appreciation throughout the year. P&G also had the lowest EPS and 2nd lowest Profit Margin out of the consumer giants.

Warren Buffett Bill Ackman PG

One of P&G’s main difficulties, increasing and retaining market share across its diverse product lines, have been of particular concern. P&G passed some of its higher costs to its consumers last year expecting its competitors to do the same. Instead, competitors chose not to raise their prices and P&G found it losing market share (rapidly). As a result, CEO Robert McDonald was forced to report profit warnings on P&G twice in the last fiscal quarter, which was not taken kindly by the Wall Streets analysts covering the company.

Bill Ackman has a plan (which he’ll eventually reveal) on how to turn P&G around, but he’ll have to influence significant shareholders to vote in his favor. His track record in recent investments should help him persuade. His activist role in Kraft was speculated to have made a profit of 163 million from an investment of 630 million. This likely pleased another large shareholder of Kraft at the time, Warren Buffett. Buffett was Kraft’s largest shareholder in 2011, but he was also largely disappointed in Kraft’s acquisition of Cadbury in 2010. The decision in 2011 for Kraft to split into 2 segments (largely credited to activist investors such as Ackman) resulted in a favorable price jump and was well-received by Buffett. Both Buffett and Ackman likely see eye-to-eye on business decisions.

Buffett’s Berkshire Halfway is also the largest individual shareholder in Procter and Gamble. Ackman has already proved beneficial to Buffett’s Kraft holdings. Considering both investors prefer long-term investments in a small number of companies, it isn’t farfetched that Buffett would back Ackman. The combined stakes of Buffett and Ackman would be impossible for P&G management to ignore. Ackman isn’t just betting that he can turn P&G around, he’s betting that Buffett will support him doing it.

Given Ackman’s record, this is a jolt for P&G management to wake up and that is great news for any P&G shareholder.

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