Procter & Gamble’s Step in the Right Direction

Procter & Gamble’s announcement on Duracell highlights the value of focus at the sprawling $225 billion consumer products giant. Investors were energized by the behemoth’s plan to split off its batteries arm. Spinning off the battery business won’t create much value on its own. But it’s a solid plank in the campaign by Procter & Gamble’s chief executive, A.G. Lafley, to shed underperforming brands and simplify an unwieldy business.

Procter & Gamble’s shares rose 3 percent on news of the battery exit, which will probably take the form of a spinoff to shareholders. The resulting $7 billion lift to the company’s market value handily matches the price Gillette paid for Duracell, the top battery brand in the United States, in 1996. P.&G. inherited Duracell when it bought Gillette nine years later.

Duracell is unlikely to be worth that much as a stand-alone company. Analysts at Bernstein estimate the battery unit makes earnings before interest, tax, depreciation and amortization of about $580 million — or 3 percent of Procter & Gamble’s forecast Ebitda for the fiscal year ending next June, according to estimates tracked by Thomson Reuters. On an enterprise multiple of seven times Ebitda — reflecting the fact that batteries are a mature commodity product with few growth prospects — the business would be worth $4 billion.

The spinoff may be more valuable for the signal it telegraphs. Coming less than three months after Mr. Lafley announced a plan to cull up to 100 lackluster brands, it suggests that the he is working with appropriate urgency and willing to consider large divestitures.

It will take time for Mr. Lafley to show that narrowing the company’s focus to a few dozen core brands can revive sluggish sales. Announcing its quarterly results on Friday, Procter & Gamble said it still expected only modest single-digit increases in annual revenue growth in 2015. Still, the market’s energetic reaction suggests the lumbering giant is moving in the right direction.

Kevin Allison is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.