9/22/08

Procter & Gamble, Folgers, and Smuckers

I mentioned Procter & Gamble's (PG) all stock sale of Folgers to Smuckers (SJM) in my bullish case for PG posted in July. The deal is expected to close by the end of the year. As the timeline and details of the deal are not very easily found online, I thought I'd post a summary.

All Smuckers shareholders of record as of 9/30/08 will receive a special dividend of $5 per share on 10/31/08. Smuckers shareholders will vote on the deal to merge with Folgers on October 16, 2008.

If Smuckers shareholders and the Federal Trade Commission approve the deal, Folgers will issue Folgers common stock amounting to 1.1524 times the number of Smuckers shares outstanding. Folgers will give this stock to Procter & Gamble. Folgers will then borrow $350 million and pay it to Procter & Gamble as a dividend.

Procter & Gamble then will deliver the Folgers shares to an exchange agent who will hold the shares in trust for PG's shareholders. Procter & Gamble shareholders will have the opportunity to exchange some or all of their shares for Folgers stock. The price at which the shares are exchanged will be determined by Procter & Gamble. It will be based on the prices at which PG and Smuckers are trading, and there will be a certain discount for PG shareholders. One of the deal's conditions is that at least 59% of the Folgers shares are exchanged for Procter & Gamble shares. If some Folgers shares are left over, they will be distributed (and converted into Smuckers shares) to PG shareholders as a pro rata dividend at a rate determined by the exchange agent.

A subsidiary of Smuckers will merge into Folgers. The Folgers shares will then convert into the right to receive one Smucker share for each Folgers share. Folgers shareholders will then own about 53.5% of the new company. Current Smuckers shareholders will own 46.5% of the new company.

The deal is expected to be beneficial for both Procter & Gamble and Smuckers. PG will have $350 million less debt on its balance sheet and won't have to worry about a low margin brand to which it hasn't been paying much attention. Smuckers, which can better focus on Folgers and which previously bought and successfully turned around PG's Jif and Crisco brands, will add around $1.6 billion to its annual sales. Currently at 0%, coffee is expected to produce 42% of Smucker's future sales. After the transaction, Smuckers will be more than twice as big as it currently is.

If you're a PG shareholder and are thinking about whether or not to exchange shares, please carefully read the prospectus that will be sent to you in the mail. It should come from your broker or clearinghouse, along with a slip to fill out if you want to exchange shares. The most important consideration is whether you want to be a Smuckers shareholder now that Smuckers will own Folgers, and whether you want to own as many shares of Procter & Gamble now that the company won't have a coffee business.

If you decide you want to exchange some of your PG shares for SJM shares, consider carefully all the risks involved in such an exchange. There are two big ones:

(1) You won't know how many shares of SJM you're getting until after the exchange takes place. This can mean that you're better off simply selling some of your PG shares and using the proceeds to buy SJM.

(2) After the exchange takes place, and especially if PG gives its shareholders some left over SJM shares as a dividend, SJM stock may be sold off. There are various mutual funds and ETFs that hold PG but either do not want to, or, by their rules, are not permitted to own SJM. Funds and ETFs that own only stocks in the Dow Jones Industrial Average (e.g., DIA) are one example. If they receive SJM stock they may be forced to sell. Depending on how many SJM shares are sold off as a result, the stock can go lower for a time.

I'm not sure whether I want to exchange some of my PG shares for SJM. However, given the two points above, I would rather wait until the deal is finalized, and then, if I decide to get some SJM in exchange for my PG, I'll sell PG and buy SJM in the regular way.

If you bought PG above where it's currently trading and would like to exchange some of your PG shares for SJM, it may be worthwhile to sell PG for a tax loss and use the proceeds to buy SJM rather than participating in the exchange.

Disclosure: At the time of writing, I own PG.