Procter & Gamble Venture Should Fix Biggest Problems

What Happened?
Procter & Gamble (PG) said Wednesday morning that it is forming a joint venture with Coca-Cola (KO) to focus on the two companies' juice and snack businesses. The yet-to-be-named subsidiary should have $4 billion in annual revenue, which the companies expect to increase to $5 billion within two years. P&G's Pringles and Sunny Delight brands will become part of this new venture; Coke will contribute eight juice brands, including Hi-C and Minute Maid.

What It Means for Investors
This is terrific news for P&G. We believe that this move represents a much-needed strategy shift for the consumer product king. The company has steadfastly held on to its struggling food business even as it became increasingly evident, through sagging sales, that a shakeup of some sort was needed. We had previously suggested that P&G sell its food unit in order to focus on its core business of making household products like Tide and Mr. Clean. We believe the formation of this new company with Coke might provide as much benefit as an outright asset sale, if not more.

Through this deal, P&G will gain access to Coke's vast distribution system. In the United States alone, Coke has 1.5 million distribution points compared with P&G's 150,000. Once Pringles cans start being delivered on Coke trucks, we envision more of the potato chips landing on convenience store and grocery shelves, giving them greater opportunity to steal sales from PepsiCo's (PEP) snack division, Frito-Lay. Thus, P&G and Coke expect most of the new company's forecast synergies ($120 million of the planned $200 million) to come from increased Pringles sales. Assuming the companies achieve success in this new venture, we see the potential for P&G to shift its other food brands, including Folgers coffee, Jif peanut butter, and Crisco shortening, to this venture or conduct some other further restructuring of its food unit. However, this deal should fix the biggest problems with P&G's food brands. In addition, it shows that P&G's management is finally becoming willing to make the bold moves necessary to turn around the company.

Morningstar.com's Premium subscribers can read the full Analyst Report on this stock. Or read Analyst Reports on 1,000 stocks and 2,000 funds, free for 30 days.