Procter & Gamble in deal to buy Gillette

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P&G in deal to buy Gillette
By Carolyn Pritchard, MarketWatch
Last Update: 2:02 AM ET Jan. 28, 2005   
 

SAN FRANCISCO (MarketWatch) -- Procter & Gamble Co. said early Friday it will buy the Gillette Co. in a stock swap worth about $57 billion, creating the world's largest consumer products company with 21 brands -- from Pampers to Duracell batteries -- that have more than a billion dollars each in annual sales.

Cincinnati-based P&G (PG: news, chart, profile) will pay 0.975 P&G shares for each share of Boston-based Gillette (G: news, chart, profile) , valuing the stock at $53.94 -- a premium of about 18 percent.

Gillette shares, which hit a 52-week high Thursday of $45.90, have risen from about $40 in the fall. P&G stock has risen 32 percent during the past two years, giving the company strong currency to engineer a major acquisition.

The deal merges Procter & Gamble, with 110,000 employees and nearly $52 billion in sales last year, with 101-year-old Gillette, which has about 35,000 workers and reported $9.25 billion in sales last year.

Gillette Chairman, President and CEO James Kilts is expected to join P&G's board and become a vice chairman overseeing Gillette's business.

"This combination of two best-in-class consumer products companies, at a time when they are both operating from a position of strength, is a unique opportunity," A.G. Lafley, chairman, president and chief executive of P&G, said in a statement.

"Gillette and P&G have similar cultures and complementary core strengths in branding, innovation, scale and go-to-market capabilities, making it a terrific fit," Lafley said.

"This merger is going to create the greatest consumer products company in the world," said Warren Buffett, chairman and CEO of Berkshire Hathaway Inc., Gillette's largest shareholder. "It's a dream deal. To quantify that, I intend to purchase enough shares so that by the time the deal is closed, we will have 100 million shares of P&G."

Berkshire Hathaway (BRKA: news, chart, profile) (BRKB: news, chart, profile) currently holds 96 million shares of Gillette stock which represents the equivalent of 93.6 million shares of P&G.

To reduce the dilutive effect of the deal, P&G said it plans to buy back between $18 billion and $22 billion of its stock over the next 12 months to 18 months.

Gillette and P&G plan to cut 4 percent of their combined work force of about 140,000, though the companies anticipate they still will have a major presence in Boston, Gillette's headquarters, according to the Wall Street Journal which first broke the story.

A spokesperson for Boston Mayor Thomas M. Menino said the city was reviewing reports of the deal but had no immediate comment.

P&G has long coveted Gillette, seeing its razor business as a natural extension for the array of consumer products marketed by P&G. A.G. Lafley's predecessor as chief executive, Durk Jager, made a secret, unsolicited attempt to buy Gillette five years ago but was rebuffed.

News of the deal comes as many consumer goods companies are in a tremendous battle for market share and spending more and more money on marketing, advertising and research and development.

At the same time, commodities prices are climbing and it's tough to raise product prices for the consumer. A key solution is to boost the bottom line through volume growth from acquisitions.

Gillette has a storied history of fighting off hostile takeover attempts, notably between 1986 and 1989, when it was the target of two of the period's notable raiders, Ronald Perelman and Coniston Partners. Gillette's first woman board member, Rita Ricardo-Campbell, detailed her account of the period in a 1997 book, "Resisting Hostile Takeovers: The Case of Gillette."

Procter & Gamble financial results

On Thursday, P&G posted a 12 percent rise in second-quarter earnings, to $2.04 billion, or 74 cents a share, from $1.82 billion, or 65 cents, in last year's period. The consensus outlook called for earnings of 72 cents a share.

For fiscal 2005, P&G said - before news of the potential deal broke -it now expects to earn $2.61 to $2.64 a share, an increase of 3 cents from its previous range and ahead of the consensus projection for earnings of $2.60 a share compiled by Thomson First Call.

Full-year sales are forecast to improve by a high-single-digit percentage, P&G said, with foreign exchange effects adding about 2 percent to that total.

The company posted sales of $51.41 billion in fiscal 2004.

For the third quarter, earnings are projected at 60 to 62 cents a share, straddling the consensus view of 61 cents.

P&G said the revision was based on strong sales and volume gains throughout its portfolio of brands and across its global sales regions. See full story.

P&G's strategy

P&G has facilities in more than 80 countries. Its brands include Pampers diapers, Tide laundry detergent, Pringles potato chips and Head & Shoulders shampoo.

At its annual analysts meeting in early December, P&G outlined its strategy to capture rapidly growing markets of developing countries.

Last fiscal year, developing markets represented about 21 percent of P&G's $51.41 billion in sales, versus as much as 45 percent for some of its key competitors, the company said.

According to P&G's research, consumers in developed markets buy more than three times as many consumer products as their counterparts in developing countries. More importantly, as the economies of developing countries grow, consumption of consumer goods has been catching up, according to Bob McDonald, head of global operations. See full story.

Gillette's position

Consumer-products giant Gillette built its global presence on razor blades and shaving products and now includes Duracell batteries, Braun electric shavers and hair care products; Oral Care dental care products as well as skin care products and deodorants. The company has 32 manufacturing plants in 14 countries.

In late October, Gillette said it made $475 million, or 47 cents a share, in the third quarter, compared with last year's $416 million, or 41 cents a share.

Sales at Gillette reached a record $2.69 billion vs. last year's $2.4 billion as consumers demand for Gillette's new M3Power razor and other premium shaving systems were robust in the United Kingdom., Germany and Japan. See full story.

The company is scheduled to report fourth-quarter earnings Feb. 3. Analyst polled by Thomson First Call are looking for a profit of 42 cents a share vs. 35 cents a share a year earlier. Revenue is seen coming in at $2.88 billion compared with $2.62 billion.

For the year, Wall Street is looking for earnings of $1.68 a share vs. $1.34 a share. Revenue is expected to be $10.84 billion.

P&G's Gillette deal would rock rivals
By Dan Burrows, MarketWatch
Last Update: 12:20 AM ET Jan. 28, 2005   
 

NEW YORK (MarketWatch) -- Procter & Gamble Co.'s planned $54 billion acquisition of Gillette Co. would not only create the world's largest consumer goods company, it would also likely create global-size headaches for both companies' rivals.

Colgate-Palmolive Co. (CO: news, chart, profile) , a direct competitor of P&G (PG: news, chart, profile) and Gillette (G: news, chart, profile) , already is locked in a brutal battle for market share and incremental volume growth.

Many of the New York company's brands already compete head-to-head with P&G and Gillette's wares on retailers' shelves. Colgate toothpaste and Speed Stick deodorant, for example, fight for customer's dollars against P&G's Crest toothpaste and Right Guard deodorant from Gillette. The companies also vie for shelf space and favorable terms from the world's retailers, especially the biggest -- Wal-Mart Stores Inc.

A merger of P&G and Gillette would not only bring Colgate's two biggest direct competitors together under one corporate umbrella, it also would combine their already considerable advertising, marketing and research and development resources and talent.

Moreover, P&G would expand into new product categories in which it currently does not compete: Gillette owns the premium razor and blade brand, and Duracell, the premier battery brand. P&G would also add Gillette's number-one oral care brand, Oral B -- a direct strike at Colgate's own oral care business. Those product- and brand-portfolio expansions could potentially give P&G more leverage in its dealing with Wal-Mart and other retailers.

The acquisition also would add about 20 percent to P&G's sales virtually overnight in a business where sales growth is ever harder to come by and increasingly driven by volume gains and foreign currency exchange. To put that in perspective, Gillette and Colgate are each about $10 billion companies in terms of annual revenue. A P&G acquisition of Gillette would be comparable to adding the entirety of Colgate's sales to P&G's top line.

The acquisition would also send a salvo across the bows of Gillette's rivals in the razor, blades and battery business. Energizer Holdings Inc. (ENR: news, chart, profile) holds it own with its eponymous batteries and Schick and Wilkinson razor and blades brands. But with less than $3 billion in annual revenue, it would find itself doing battle with Gillette as part of a $60 billion global conglomerate.

Rayovac Corp. (ROV: news, chart, profile) for its part, would be even more hard pressed. Rayovac batteries lag in brand power behind both Duracell and Energizer, as does its Remington razor business. And with less than $1.5 billion in sales, the company suddenly would find that the distance between its own resources and those of Gillette's had grown exponentially.