Jon MoellerThe Johnson School

March 7th, 2011

Today’s Team

Jon Moeller (B.S. 1986 / MBA 1988)

Chief Financial Officer

Chris Peterson (B.S. 1988)

Finance Vice President, Household Care

Andy Fitzpatrick (B.S. 1997/ MBA 2003)

Finance Manager, Global Business Services

Jon Moeller

Role Year

Food and Beverage Finance (Various Roles) 1988-1994

Finance Director- China Laundry, Salted Snacks/ Personal Cleansing

1994-1998

Finance Director- Corporate Forecast and Analysis

1999

Finance VP Global Beauty Care 2002-2006

Vice President and Treasurer 2007

Chief Financial Officer 2009

Company History

Established 1837Incorporated 1890Headquarters in Cincinnati,

Ohio, USAMarket Cap - $180 Billion

Company Facts *

Revenue $79 Billion

Earnings $13 Billion

Free cash flow $13 Billion

Employees 127,000

Dividends- 121 consecutive years- 54 consecutive years of

increase

* Fiscal year ended June 30, 2010

Global Sales

North America

Western Europe

Asia

Latin America

Central & Eastern Europe, Middle East & Africa

P&G sells products in over 180 countries with ground operations in over 80 countries.

Target = 90%+

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100%

101%

125%

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* Adjusted free cash flow is operating cash flow less capital spending and tax impacts from major divestitures. Adjusted free cash flow productivity is the ratio of adjusted free cash flow to net earnings excluding major divestiture gains.

Cash GenerationAdjusted Free Cash Flow Productivity*

FY ’06 FY ’07 FY ’08 FY ’09 FY ’10

$2

$4

$6

$8

$10

$12

$14

Global Business Units (GBUs)

Owns P&L for Company38 major product categories

under 2 Mega-GBUsBeauty & Grooming & Household

Care

#1 or #2 market share position in the majority of categories where P&G competes

Antiperspirants/Deodorants

Baby Care

Batteries

Blades & Razors

CosmeticsFabric Care

Family Care

Feminine Care

Fine Fragrance

Home Care

Oral Care

Personal Cleansing

Personal Health Care

Pet Care

Professional Hair Care

Retail Hair Care

Skin Care

Snacks

Leadership Brands

Purpose-inspired Growth Strategy

MORECONSUMER

S

MORE PARTS OF THE WORLD

MORECOMPLETE

LY

Purpose-inspired Growth Strategy

How-to-Win Strategies

INNOVATION INTEGRATION SIMPLIFICATION

How-to-Win Strategies

TO IMPROVE CONSUMERS

LIVES

TO OPERATE AS ONE

COMPANY

TO DRIVE PRODUCTIVITY & LOWER

COSTS

P&G Strategic Planning Process

Annual Portfolio Review – Finance Led Process

• Each GBU is reviewed annually for:

− 1,3,5,10 year trends

− Key measurement areas: revenue growth, profit growth, cash flow and shareholder value creation

• Each industry is reviewed for attractiveness

− Market size, growth rates, competitive environment

− Fit with P&G’s core capabilities

− P&G’s right to win

• Decision is made to keep or exit business

Portfolio ManagementM&A – Past 10 Years

>80 Divestitures

Including: Zest Pharmaceuticals

FolgersTissue/Towel – EuropeJuiceJif/CriscoNoxzemaPertSureRight Guard

>25 Acquisitions

Including:AmbiPur

Natura Gillette

WellaClairolIams

P&G M&A Process

• P&G Business Unit Finance identifies M&A candidates

• P&G assigns a Deal Manager from Corporate A&D Team − Finance Associate Directors with P&G experience

• Deal Manager responsible for:• Interface between Business Owner (own the Decision), External Advisors, and Corporate Staff

• Project Management, Managing 3rd Party Advisors, Single Point of Contact for Target Company

• Secure Internal Resources and completion of proper due diligence (Tax, Corp Accounting)

• Co-Lead Negotiations with Legal

• P&G typically only uses Investment Bankers if issuing debt or equity

Folgers Coffee Company Case

Folgers History

• History:• Founded in 1850 by James Folger in San Francisco

• Bought by P&G in 1963

• Iconic Brand with some of the most famous TV Commercials in History−“Best Part of Waking Up is Folgers in Your Cup”

Folgers Commercial

Folgers Coffee CompanyKey Facts

• Approximately 1,200 Employees

• #1 US Retail Company by Sales and Volume

• $1.7 Billion in NOS/ $378 Million EBIDTA

• 40% Market Share on Volume basis

• #2 Gourmet Coffee Company

• #1 in Sales and Volume in every major retail channel

Millstone (8.1%)Comercial (6.6%)Retail (85.3%)

Question #1

Should P&G Keep or Sell Folgers?

Why or Why Not?

Key Reasons to Exit Coffee Business

1. Projected Growth Rate below P&G long term growth rate for Revenue and Profit

• NA Business with high household penetration (limited ability to bring in new buyers)

• Limited synergies with existing P&G brands− Purchasing different materials than other P&G Brands

− Limited ability to reapply R&D to/from other brands

− Disproportionate Share in Food Channel compared to other Brands

2. Highly Exposed to Commodity Cost (Coffee Beans) adds risk to owning business

• Commodity Cost limits margin expansion opportunities

3. Opportunity Cost – Money tied up in Coffee business could be invested in higher return “Health and Beauty Care Business”

Question #2

How much is Folgers

worth to P&G?

Value of Folgers to P&G

• Value - $2 to $2.5 Billion (DCF Analysis)• DCF used as positive DCF creates value for shareholders

− Allows Comparison of M&A vs internal opportunities (geographic expansion, Marketing Spend)

• Multiples used to benchmark likely sell/buy price but not judge of shareholder value creation

• Factors to Consider:• Expected Growth Rate

• Stranded Overhead

• Discount Rate (P&G WACC)

• EPS Impact

• Cash Flow Impact

Question #3:P&G has decided to divest the business.

What are the Pros/Cons for different types of Transactions?

Potential Transactions:

1. Cash Sale

2. Split Off

3. Spin Off

4. Reverse Morris Trust (RMT)

What are Pros/Cons of Different Transactions?

1. Cash SaleBuyer buys business for Cash

• Pros

− Easiest to execute as you do not need audited financial statements (for IRS/SEC)

− Do not need to set up independent company but instead can sell “Assets”

− Attract the most buyers (Strategic and Financial)

• Cons

− Buyer needs to be able to pay higher than Keep Price plus Taxes ($1 Billion for Folgers)

− More dilutive to P&G EPS than a split off or RMT transaction

What are Pros/Cons of Different Transactions?

2. Split Off P&G Shareholders can “opt in” to exchange P&G Stock for shares in new Company

• Pros

− Reduces P&G shares outstanding

− Tax Free Transaction

− Investors choose to “opt in” aligning new company shareholders with Folgers Business Model

− Less dilutive to P&G EPS than a cash sale or spin off

• Cons

− Need to convince investors of value of Folgers Coffee Company. Need enough to “Opt In” so more than 80% of shares are distributed

− IRS/SEC Regulations require a fully functioning company ‘Day One”

− Need historical audited financial statements for past 3 years as if business was independent

− Capital market transaction - requires financial markets to be receptive

What are Pros/Cons of different transactions?

3. Spin- OffAll P&G shareholders get a pro-rata share of stock in Coffee Business

• Pros

− Stock is distributed pro-rata to all stockholders so need to “convince” them to buy Folgers

− Tax Free Transaction

• Cons

− Reduces P&G stock price as portion of value transferred to new entity

− IRS/SEC Regulations require a fully functioning company ‘Day One”

− Shareholder relations - forcing P&G shareholders to take Folgers company stock

− New Company has volatility post-IPO as many P&G shareholders would not want to own a stand alone small company and would sell stock.

− Dependant on financial markets being receptive to deal

What are Pros/Cons of Different Transactions?

4. Reverse Morris TrustP&G splits off Coffee Company which immediately merges with another company

• Pros

− Strategic Buyer can increase bid through “Synergies”

− Tax Free Transaction

− Reduced Market Risk than Spin/Split as you are exchanging for established value (Smucker’s Shares)

− Less dilutive to P&G EPS than a cash sale or spin off

• Cons

− Limited Companies that are right size (Folgers value needs to be greater than 50% of new company) limits P&G negotiating position

− Regulatory Approvals (Anti-Trust) needed for Strategic Buyer

− Capital market transaction - requires financial markets to be receptive

Question #4:

Should Smucker’s Buy the Business?

Why or Why Not?

What are the pros/cons for Smucker’s Shareholders?

• Pros• Cross-sell and cost synergies with existing business

• Fit with Focus of US Business in Center of Grocery

• Purchase of Jif/Crisco from P&G in 2001 was a good fit for Smucker’s

• Gain access to solid Folgers Management team

• Cons• P&G shareholders receive 53% of company & Smucker’s needs to take

on debt

• Large Integration for size of Smucker’s Company

• Higher Visibility (part of S&P 500) & focus on family controlled company

Question #5:

What is Folgers worth to

Smucker’s?

Value of Folgers Coffee Company

• Considerations when acquiring a business1. Long Term Growth Rates (Industry Attractiveness)

2. Value of Existing Business

3. Revenue Synergies

4. Cost Synergies

5. Impact on EPS

6. Capital Structure

• Smucker’s ultimately “Paid” $2.8 Billion for Folgers

What actually happened?

Coffee Business Separation

• In June 2007, P&G’s Board authorized Management to explore divesture of the Coffee Business as part of the Board’s Strategy Review

• In Fall 2007, P&G explored, with outside counsel and Investment Bankers, different potential divesture options for Folgers.

• On January 31 2008, P&G announced our intention to separate the Coffee business via a Spin-Off or Split-Off transaction, with a preference for a Split-Off to be executed in 2nd Half of Year

• P&G named James Egasti as CEO and he began the preparation to run Folgers as a stand alone business

Smucker’s Bid

• J.M. Smucker Co. has long viewed Folgers as a potential Brand that would fit well with their Center of the Store Strategy

• After P&G filed the Form 10 (SEC Document used as pre-reading for this case) Smucker’s made a non-binding offer for the Coffee Business in April 2008

• P&G negotiated with Smucker’s in April and May

• Preparation for the Split-Off continued in a parallel process due to the uncertainty of completing transaction

• Announced on June 4th 2008 that P&G would sell the business to Smucker’s instead of splitting off into a stand-along business

Transaction

• Reverse Morris Trust

1. Tax Free Transaction

2. Folgers shareholders will own 53.5% of the Smucker’s company

3. Smucker’s shareholders will receive a one time $5/per share dividend

4. Smucker’s will assume $350MM of Folger’s Debt providing some cash to P&G

Employee Considerations

• Switch from Split-off to Reverse Morris Trust

• Definition of In-Scope Employees

• Terms of employee transfer

Investment Community Reaction

• Smucker’s sale was positively received by the investment community.

• P&G investors liked:• The attractive economics/value created by the deal, and viewed the

transaction as a “win-win”• Confirmation that we remain on a path to divest under-performing/

non-strategic assets• The split-off mechanism for share exchange, which provides each

P&G shareholder choice on whether to participate

• Delivered approximately $500 Million in Shareholder Value by this transaction compared to the “Keep Price”

Deal Manager Role for Folgers

• Folgers not typical due to size of business & complex transaction (Reverse Morris Trust)

• Deal Manager Responsibility• Split Off

− Coordinated early efforts to develop potential deal strategies (Reverse Morris Trust) with consultants and Investment Banks

− Led Multi-Functional team to design new org structure, policies for transferring to new company, and business strategy that would deliver financial projections

− Managed Group of Experts (Tax, Accounting) to ensure compliance with SEC Filing Requirements

− Assisted Treasurer in selection of Equity Manager (I-Bank) and Debt Placement Manager (I-Bank)

− Participated in negotiations with selected CEO

• Reverse Morris Trust− Led Creation of Selling Documents and Management Presentation to Smuckers

− Led Sub-Parts of Negotiations (Organization Transaction, Temporary Services Agreement)

− Transition Leader to Smuckers