The Wall Street Journal-20080213-Folgers May Find It Tough Drawing Investor Interest

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Folgers May Find It Tough Drawing Investor Interest

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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 Co. likely will be allowed to decide if they want to exchange their P&G stock for shares in the Folgers Coffee Co. Several Procter & Gamble shareholders said 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 draw interest in the new company.

Most P&G shareholders tend to be holders of stable, large-cap stocks, and own shares of the company to get exposure to the consumer- staples industry. Folgers, which had revenue of $1.6 billion and operating earnings of $350 million in its fiscal 2007, is a far cry from P&G, which in its fiscal year ended June 30 had sales of $76.5 billion and net income of $10.3 billion. Folgers will be a coffee company, while P&G has dozens of diverse brands, 23 of which bring in more than $1 billion each in annual sales.

Keith Wirtz, president and chief investment officer of Fifth Third Asset Management Inc. -- which owns P&G stock -- said his firm will probably stay away from Folgers after the split.

"It will be a single-product company," he said. Still, Mr. Wirtz and his team will wait to hear how Procter will structure the deal before making their final decision. "It is our expectation they are going to have to incentivize people to consider it," said Mr. 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 "split-off" in recent years was Viacom Inc.'s separation of an 81.5% share in Blockbuster Inc., which offered shareholders the option of getting 5.15 Blockbuster shares for each share of Viacom they owned. Blockbuster already was a publicly traded company at the time, and the dollar value of the 5.15 Blockbuster shares gave Viacom holders a premium over their value of Viacom shares. Ultimately, Viacom's tender offer on Blockbuster shares was oversubscribed.

Procter & Gamble has said it is leaning toward 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, 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 spinoff.

"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 has been posting sales growth below P&G's annual target, will employ about 1,250 workers and have its headquarters in Cincinnati. The company also will have a small tea business under the Tender Leaf brand.

Folgers dominates the ground-coffee market in the U.S., and with $1 billion in sales it wouldn't be an expensive acquisition target.

Folgers still is 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.

Procter & Gamble said the coffee business will get greater priority and attention as a stand-alone company.

Folgers will have a number of challenges. In-home consumption of regular coffee has been declining over the past 10 years, but flavored and specialty coffee consumption has been rising slightly, according to NPD Group Inc.

Folgers's competitors range from Starbucks Corp. 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 Mr. Cox about Folgers.

The coffee maker might attract some interest in this financial environment because it is in a sector that is relatively insensitive to an economic slowdown, said Walter Todd, portfolio manager at Greenwood Capital Associates LLC, which owns Procter shares. But he said his firm still is unlikely to opt for Folgers shares because they like the stability offered by large-cap Procter.