New York, Feb. 8 - Folgers has enticed coffee drinkers by promising to be "the best part of wakin' up."
Investors may need a little more persuasion to reach for Folgers shares.
The maker of the namesake coffee in its various forms will soon be broken off into a stand-alone company, and shareholders of parent Procter & Gamble will likely be allowed to decide if they want to exchange their P&G stock for shares in the Folgers Coffee Co. But Folgers will be wholly focused on coffee and will become independent at a time of fierce competition in that industry. Several Procter & Gamble shareholders say they are unlikely to be interested in exchanging their P&G holdings.
They expect the Cincinnati giant to sweeten the pot by offering an attractive rate of exchange on Folgers stock to attract interest in the new company.
Most P&G shareholders tend to be holders of stable, large-cap stocks, and own shares of the Cincinnati company in order to get exposure to the consumer staples industry. Folgers, which has revenue of $1.6 billion and operating income of $350 million, is a far cry from Procter, which in its last fiscal year had annual sales of $76.5 billion and earned $10.3 billion. Folgers will be a coffee company, while P&G has dozens of diverse brands, twenty three of which bring in more than $1 billion each in annual sales.
Keith Wirtz, president and chief investment officer of Fifth Third Asset Management - which in its last regulatory filing reported owning more than 12 million Procter shares - said his firm will probably stay away from Folgers after the split.
"It will be a single product company," he said. Still, Wirtz and his team will wait to hear how Procter will ultimately structure the deal before making their final decision. "It is our expectation they are going to have to incentivize people to consider it. We want to see how they bribe people," said Wirtz, who believes the company may offer an exchange ratio that is compelling or Folgers may throw the lure of some kind of dividend.
One fairly high profile "spilt off" in recent years was Viacom Inc.'s separation of its 81.5% share in Blockbuster Inc., which offered shareholders the option of getting 5.15 Blockbuster shares for each Viacom stock they owned. Blockbuster was already a publicly traded company at the time and the dollar value of the 5.15 Blockbuster shares gave Viacom holders a premium over then value of Viacom shares. Ultimately, Viacom's tender offer on Blockbuster shares was oversubscribed.
So far Procter & Gamble has said it is leaning towards a split-off, but has discounted the possibility of a spinoff for Folgers. In a spinoff, all P&G shareholders would get some ownership in the new company at a predetermined ratio. In a split-off, however, Procter holders would be given the option of exchanging their P&G shares for shares in the coffee company. The split-off is seen as a more favorable option because it is expected to be tax-free for shareholders and will dilute annual earnings less than would a spin-off.
"Regardless of the route we take, Folgers is a very successful business and we are confident that it will be attractive to investors," said P&G spokesman Paul Fox.
Folgers - which is being spun off because it has been posting sales growth below Procter & Gamble's annual target - will become the independent Folgers Coffee Co., employ about 1,250 employees and have its headquarters in Cincinnati. The company will also have a small tea business under the Tender Leaf brand name.
"We've owned (P&G) for almost 20 years and view it as the quintessential staples trading stock," said David Klaskin, chief investment officer, for Oak Ridge Investments, adding that his firm is unlikely to opt for the Folgers exchange. Still, Klaskin believes that Folgers shares could be attractive to some P&G holders who believe the coffee company may be a possible acquisition target.
Folgers dominates in the ground coffee market in the U.S., and with $1 billion in sales it wouldn't be a hugely expensive acquisition target.
Folgers is still a "fantastic" brand, and could attract potential acquirers, especially foreign investors looking to take advantage of the weak dollar, said Dan Cox, president of coffee testing company Coffee Analysts.
Oak Ridge's Klaskin believes that Folgers would want to be perceived as a blue-chip stock, and will likely pay a dividend although it won't be a huge one. The company would want to attract investors who are "somewhere down the middle in terms of risk volatility," he said.
Procter & Gamble says the coffee business will get greater priority and attention as a standalone company. Indeed, Folgers will have a number of challenges. In-home consumption of regular coffee has been declining over the last 10 years, but flavored and specialty coffee consumption has been rising slightly, according to the NPD Group.
Folger's current set of competitors ranges from Starbucks to Kraft Foods Inc.'s Maxwell House coffee. "They are going to have to increase their customer base. They need to get customers who are switching to more regional, high end brands," said Cox about Folgers.
The coffee maker might attract some interest in the current financial environment because it is in a sector that is relatively insensitive to an economic slowdown, says Walter Todd, portfolio manager at Greenwood Capital Associates, which owns Procter shares. But he says his firm is still unlikely to opt for Folgers shares because they like the stability offered by large-cap Procter.
P&G shares recently traded down 32 cents at $65.44.