Archive for Saturday, January 29, 2005

Procter to buy Gillette

$57B purchase likely to cost 6,000 jobs

January 29, 2005


— Consumer products giant Procter & Gamble Co. is buying Gillette Co., a leading maker of men's shaving supplies, for $57 billion in a bid to expand sales overseas, broaden its product lines and gain clout against massive retailers like Wal-Mart Stores Inc.

P&G;, whose products like Tide, Pampers and Clairol are mainly targeted at women, also will pick up Gillette's expertise in marketing to men.

The proposed merger, announc-ed Friday, would create a behemoth with more than $60 billion in revenues that would eclipse Unilever, the maker of Dove soap and Lipton tea, as the world's largest consumer product company.

Gillette is considerably smaller than the blue-chip P&G;, but its array of profitable and fast-growing products made it a natural fit, executives said. Gillette, which also makes Oral-B toothbrushes, Right Guard deodorant and Duracell batteries, is hoping that P&G;'s big overseas marketing and sales operations will help it break into developing markets like China and Eastern Europe.

The deal awaits shareholder and regulatory approval.

"We believe we can bring these companies together and create a juggernaut," Gillette Chief Executive James M. Kilts told analysts at a presentation Friday. Kilts will become vice chairman of P&G; and join its board and has agreed to stay on for at least a year to see through the integration of the two companies.

"I'm a great believer in scale," Kilts said, noting that he would rather lead a consolidation in consumer products makers than "get stuck with the leftovers."

The companies have relatively little overlap, said A.G. Lafley, P&G;'s chief executive, who does not expect that antitrust regulators would force the companies to sell off many properties in order to get the deal approved.

Lafley said he hoped the addition of Gillette's product designers -- who have introduced several new lines of razors in recent years -- also would help spur product innovation.

The companies: Founded in 1901 by King Camp Gillette, inventor of the safety razor, Boston-based Gillette Co. today makes blades, razors and shaving products, as well as batteries and toothbrushes.Cincinnati-based The Procter & Gamble Co. is the No. 1 U.S. manufacturer of consumer goods ranging from Pampers diapers to Head & Shoulders shampoo and Iams pet food. The company also produces soap operas including Guiding Light.Income: In its most recent quarterly report, Gillette earned $475 million or 47 cents per share on sales of $2.69 billion. P&G; earned $2.04 billion, or 74 cents per share on sales of $14.45 billion.Employees: Gillette employs nearly 30,000 people globally, while P&G; has nearly 110,000 employees worldwide. Roughly 6,000 jobs will be eliminated after the merger.

But Lafley did acknowledge concerns from analysts that some weaker product lines might have to be jettisoned.

"You have to weed the garden every spring, and we don't wait for spring," he said. Analysts raised most concerns in particular about the Duracell battery line, which they said had not been living up to expectations.

The deal would be the largest U.S. merger since J.P. Morgan Chase & Co.'s $58 billion acquisition of Bank One Corp. last year, and marks the latest signs of vitality in the merger arena.

Just last month health care products maker Johnson & Johnson agreed to buy Guidant Corp. for $25 billion, and cell phone giant Sprint Corp. agreed to buy Nextel Communications Inc. for $35 billion.

And reports emerged this week that SBC Communications Inc. is in talks to buy AT&T; Corp.

P&G; and Gillette said they expected the merger would result in at least $14 billion in saved costs and new business to the combined enterprise. As part of the cost cuts, 6,000 people would be expected to lose their jobs, or 4 percent of the combined work force of about 140,000.

"The real deal, what this is all about, is scale," said Dan Kiley, chief executive of the Retirement Corporation of America, an investment advisory firm in Cincinnati that caters to retired P&G; employees.

Kiley said the deal would give the new P&G; greater leverage not only with retail outlets like Wal-Mart and Costco Wholesale Corp. but also with media companies who sell them advertising. But he cautioned that maintaining those relationships was key.

"You don't want to combine and become the big bully," Kiley said.

Investor Warren Buffett, whose 9.7 percent stake in Gillette makes him the company's largest shareholder, called the combination "a dream deal." In a video presentation to analysts, Buffet said he expected to increase his stake.

Cincinnati-based P&G; would pay 0.975 of a P&G; share for each share of Gillette. Based on P&G;'s closing price of $55.32 per share Thursday, the deal values Boston-based Gillette at about $54 per share -- an 18 percent premium over its closing price.

Gillette shares soared $5.92, or 13 percent, to close at $51.60 in heavy trading Friday on the New York Stock Exchange, while P&G; shares fell $1.17, or 2.1 percent, to close at $54.15 also on the NYSE.

P&G; also plans to buy back $18 billion to $22 billion of its stock during the next year to 18 months, making the deal ultimately financed with about 60 percent stock and 40 percent cash.

The deal is a bold move by P&G;'s CEO Lafley, who led the company out of dark times during the past four years. Moving too fast on a restructuring plan implemented by former CEO Durk Jager, the company posted several disappointing quarters and its stock lost more than half its value in 2000.

Lafley replaced Jager in June 2000, slowed the pace of change and got the company back on solid footing. Its stock has risen by nearly one-third since 2003, with its strong global brands powering consistent sales growth.

As it resumed growth, P&G; started acquiring brands that fit with its strategy, including Germany's Wella AG hair care line in 2003 for $5.7 billion. P&G; also acquired Clairol for its hair-care lines and Iams Co. for its pet foods.

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