P&G to Buy Gillette

P&G to Buy Gillette for $55.6 BillionJan 28, 2005 — By Jessica Wohl
NEW YORK (Reuters) - Procter & Gamble Co. on Friday said it would buy Gillette Co. in a deal worth about $55.6 billion, uniting two of the world's largest makers of household goods ranging from Pampers diapers to Duracell batteries.
The combined company would boast more than $60 billion in annual revenue, giving it increased clout with retailers on matters such as product prices and shelf space.
The deal will bolster key P&G lines such as personal products and health care. After the acquisition, half of P&G's portfolio will be made up of health-care, personal-care and beauty products, all high-growth segments of the industry, P&G Chairman and Chief Executive A.G. Lafley said.
The Business of Life: Underage Car Rentals Google 4Q Profits Increase Sevenfold Latest Market Details For Gillette, P&G's broad reach will help it sell more razors and batteries in huge developing markets like China.
"It's almost a dream deal," said Fred Burke, president of Johnston Lemon Asset Management in Washington, which manages about $170 million. P&G makes up 3 percent to 4 percent of the firm's holdings.
The acquisition, confirmed early on Friday, initially valued Gillette at an 18 percent premium to its closing stock price Thursday, giving the deal a value of about $57 billion.
P&G, which also unveiled a stock buyback of up to $22 billion, promised cost cuts of up to $16 billion and warned of layoffs of 4 percent of the combined work force of 140,000.
Gillette shares were up 12.9 percent at $51.56 in afternoon trading on the New York Stock Exchange, while P&G, a component of the Dow Jones industrial average <.DJI>, slipped 2 percent to $54.20.
The Federal Trade Commission will do a full-fledged investigation of the deal and may require P&G to divest some brands in overlapping lines of business, such as deodorants and oral care, said Robert Skitol, an antitrust lawyer with the firm Drinker Biddle. "Other than that, the expectation will be that this will be allowed."
"The overlaps are minimal," P&G Chief Financial Officer Clayt Daley told Reuters in an interview. "There are some and so we'll obviously need to work with the government authorities on hopefully resolving those overlaps."
European Union antitrust chief Neelie Kroes said she expected to review the deal.
P&G executives said they expect to close the acquisition, by far the company's largest deal ever, this fall.
Gillette's chairman and chief executive, James Kilts, will become P&G's vice chairman-Gillette. Kilts said he will remain with P&G for at least a year and roll his Gillette stock and options into P&G shares, which he will hold for at least two years.
THE HAPPY 'ORACLE'
The deal has the key support of billionaire investor Warren Buffett, whose Berkshire Hathaway Inc. has a 9 percent stake in Gillette.
Buffett said he would raise his holding in the combined company by 7 percent, to 100 million P&G shares, a $350 million investment at current prices.
Burke said that "when Buffett came out with his comments and he said he is going to buy additional shares of P&G — that seals the deal."
P&G raised its target for annual sales growth to a range of 5 percent to 7 percent, from 4 percent to 6 percent.
Analysts estimated that the deal would reduce P&G's earnings by 15 cents to 28 cents a share in fiscal 2006, which begins in July, but said that was outweighed by the strategic benefits.
The deal "creates an enterprise unmatched in geographic reach and competitive positioning … and targeted synergies of $14 billion to $16 billion are massive," said William Schmitz, analyst at Deutsche Bank Equity Research.
Morgan Stanley analyst Bill Pecoriello upgraded P&G to "overweight" from "equal-weight."
Moody's Investors Service said it may cut its debt rating on P&G, while Fitch Ratings said it may cut its debt ratings on P&G and Gillette, due to the acquisition plans.
Ratings downgrades usually raise borrowing costs. Daley said P&G has shared its projections with ratings agencies.
The acquisition would be the largest transaction since J.P. Morgan Chase & Co. purchased Bank One Corp. for $56.8 billion a year ago, according to research firm Dealogic.
Cincinnati-based P&G is swapping 0.975 shares of its stock for each Gillette share. P&G said its plan to buy back $18 billion to $22 billion of stock over the next 18 months means, essentially, that it is buying Gillette for 60 percent stock and 40 percent cash.
The deal values Gillette at 28 times projected 2005 earnings, a 40 percent premium over Colgate-Palmolive Co.'s price/earnings ratio of 20 and double the P/E ratio of battery maker Energizer Holdings Inc.
THE AD GAME
As is the case in many big deals, this one will have repercussions across many industries. In this case, the acquisition sent shudders through the advertising world as P&G, notoriously demanding of its ad agencies, gained even more heft.
"There will be pressure on the ad agency side. One way you cut costs is to consolidate agencies and get better deals," said media analyst Lorna Tilbian of Numis Securities.
P&G spent $5.76 billion on advertising in 2003, according to the most recent figures available, well ahead of Unilever's $3.54 billion, Advertising Age said.
Gillette's advertising is handled mostly by Omnicom's BBDO agency, with additional work around the globe by Havas's Arnold Worldwide, independent Acme Idea Co., Interpublic's Lowe & Partners, WPP's Ogilvy & Mather and Publicis's Leo Burnett.
"If you're the agency of a brand that gets bought by P&G, you would be more worried than happy," said an advertising industry executive who asked not to be named.
However, Procter & Gamble has shown a tendency to avoid putting all of its advertising at one company. It currently has its ad accounts spread around the industry, clustered at France's Publicis and New York-based Grey Global, which has been acquired by WPP.
SHELF SPACE
"Procter & Gamble is paying quite a bit for this," said Lauren DeSanto, a Morningstar analyst who covers P&G and Gillette. "They obviously see growth in some sectors they are not in and they are paying up for that."
The deal would give P&G strength in categories where it currently has little presence, including shaving supplies, where Gillette ranks No. 1 worldwide. It also expands P&G's retail shelf space, possibly giving it more leverage in price negotiations with retailers.
Hayes Roth, vice president of worldwide marketing at branding firm Landor Associates, said the deal makes sense for P&G, which already has a strong presence in women's grooming.
"This gets them into the men's grooming and cosmetic business — a segment they've thirsted after for awhile," he said.
Gillette's stock has climbed about 70 percent since the beginning of 2003, and profits jumped as the company focused on premium-priced products such as M3Power razors and employed long-term contracts to control rising raw material costs.
P&G said it would maintain a strong presence in the Boston area, where Gillette is based. Job cuts are likely to come from both companies.
Merrill Lynch advised P&G on the deal. UBS and Goldman Sachs acted for Gillette. (Additional reporting by Adam Pasick and Jeff Goldfarb in London; Tom Johnson, Dane Hamilton, Mark McSherry, Martha Graybow and Dena Aubin in New York; Brad Dorfman in Chicago; and Peter Kaplan in Washington)