The Procter & Gamble Company (NYSE: PG) recently announced that it would split off its Folgers coffee division into a stand-alone company. The conglomerate would offer its shareholders the opportunity to participate by exchanging their P&G shares for stock in Folgers. Interestingly, many analysts are expecting P&G to sweeten the deal by offering an attractive rate of exchange on Folgers stock to draw interest in the new company. This has many opportunistic investors watching to see just how sweet the deal will be as it could represent a great investment opportunity. So, is this a stock worth watching for your portfolio?
Foldgers will be a single product company in a difficult market once it splits off from its parent. The coffee maker may dominate the ground-coffee market in the U.S. with $1 billion in sales, but it is quickly losing ground to specialty coffee makers as demand for its plain-vanilla coffee is declining. Competitors like Starbucks Corporation (NYSE: SBUX) are stepping in to take their place. In fact, many are speculating that P&G is divesting the segment because its sales growht is below that of the conglomerate’s annual target. Foldgers will likely face a difficult market on its own and may require some work in the future before it can start posting impressive growth numbers.
So, why is Foldgers such a great deal then? The first thing to consider is that P&G will likely be forced to offer an attractive valuation that will provide some immediate returns to shareholders. Secondly, the coffee maker may attract some interest in this financial environment because it is in a sector that is relatively insensitive to economic problems. Third, Foldgers will have a market cap small enough to make it a potential acquisition candidate for foreign companies looking to leverage the cheap dollar. And finally, spin offs statistically tend to outperform the overall market during their first two years for a variety of reasons.
In the end, it is likely that most P&G shareholders will opt out of exchanging their shares because they like the safety of P&G. However, there are many catalysts that could propel this new company to new highs and this may be a great opportunity to get in at a steep discount. Combined, these factors make PG a stock worth watching closely as it moves closer to splitting off its Foldgers division!
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