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P&G Opts for a Folgers Spinoff instead of Sale (DJ)

Source: Dow Jones Newswires
17/01/2008

Jan. 17 - Procter & Gamble Co., after a months-long review of whether to sell its Folgers coffee business, has decided instead to spin off the brand to shareholders, according to a person familiar with the matter.

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The decision allows P&G to meet its initial goal of reducing its exposure to a slow-growing business while avoiding what could have been a big tax bill generated by the sale of Folgers, the person said.

P&G, which in recent years has focused on fast-growing businesses in areas such as health care and beauty, hired Blackstone Group last year to advise on the possible sale of several major brands, including Folgers, Duracell and Pringles. All operate in highly competitive markets, limiting their growth potential to below P&G's overall annual sales-gain goal of 4% to 6%.

Folgers's annual sales, at just under $2 billion, are growing between 2% and 3%. While it is the top-selling ground coffee in the U.S., it has suffered from the popularity of Starbucks Corp.'s concept and the proliferation of gourmet coffee brands. The status of the review for the other brands isn't clear.

"We don't comment or speculate on rumors," says a spokesman for P&G. A spokesman for Blackstone also declined to comment. A report of P&G's plans appeared on the Web site of the Financial Times.

P&G shares have slid about 6% since the beginning of the year amid deepening concerns over the strength of U.S. consumer spending and fears of a recession. Shedding Folgers isn't likely to significantly boost P&G's stock, says Bear Stearns analyst Justin Hott. But investors are likely to cheer P&G's efforts to trade slower-growth businesses for higher-growth ones, especially beauty products, where there has been rampant innovation, Mr. Hott says.

Yesterday P&G shares fell 51 cents, or 0.7%, to $68.84 in 4 p.m. composite trading on the New York Stock Exchange. Shedding the coffee business will likely reduce P&G's projected 2008 fiscal-year earnings of $3.51 per share by five cents, estimates Sanford Bernstein analyst Ali Dibadj.

The new stand-alone Folgers company likely will be a profitable but low-growth business, which may not wow investors. "It isn't a bad business, but coffee just isn't one of the high-growth businesses investors are looking for," says Mr. Hott, noting that most food companies are trading at a lower multiple compared with household-product makers.

Still, a stand-alone company could attract buyers in the future, says Mr. Dibadj, given Folgers's leading market share and some recently successful ventures by the business, including an arrangement to distribute Dunkin' Donuts coffee to retailers.

Since taking on P&G's top post in 2000, Chief Executive A.G. Lafley has shed most of the company's other food businesses, including Jif peanut butter, Crisco shortening and Sunny Delight orange drink.



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