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Procter & Gamble to buy Gillette for $57 billion

The Procter & Gamble Co. is embarking on its largest acquisition yet — a $57 billion deal for Gillette Co. and its pricey shaving products and batteries.
/ Source: The Associated Press

Procter & Gamble Co., the leading U.S. maker of household products whose brands include Crest, Pampers, Tide and Charmin, is buying the razor and battery maker Gillette Co. for $57 billion in a deal that will create the world’s biggest consumer-products enterprise, the companies announced Friday.

The merger, which must still be approved by regulators and shareholders, would create a company with revenues of more than $60 billion that would have even greater clout against mass-market retailers like Wal-Mart Stores Inc., which have been pressuring consumer product suppliers to keep costs low.

Executives from both companies made their case for the merger in a presentation Friday to Wall Street analysts, saying the combination would bring together the marketing and distribution strengths of P&G, whose products are marketed largely to women, together with Gillette’s high-profit brands like razors, which are marketed to mainly men.

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

As part of the cost-cutting that would follow the deal, executives said the merger would result in the elimination of about 6,000 jobs, or 4 percent of the combined work force of about 140,000.

Creating a juggernaut
“We believe we can bring these companies together and create a juggernaut,” Gillette Chief Executive James M. Kilts said at the presentation. Kilts will become vice chairman of P&G and join its board.

Kilts, who has agreed to stay on for at least a year to lead the integration of the two companies, said the combination would provide Gillette with opportunities to sell their products in developing markets including China and East Europe.

“I’m a great believer in scale,” Kilts said. He said he would rather lead a consolidation in consumer products makers than “get stuck with the leftovers.”

The deal would add Gillette’s Duracell battery, Right Guard deodorant and line of razors to P&G’s collection of more than 300 consumer brands, which include Head and Shoulders shampoo, Pringles, Crest toothpaste and Bounty paper towels.

P&G is much larger than Gillette, and has more than three times as many employees. With more than $60 billion in revenues, the new company would surpass Unilever, which has $53 billion in revenues, as the global leader in consumer products. Unilever’s brands include Dove soap, Bird’s Eye and Lipton.

Investor Warren Buffett’s company, Berkshire Hathaway Inc., owns 9.7 percent of Gillette, or about 96 million shares — a stake equivalent to 93.6 million P&G shares. Buffet, Gillette’s largest single shareholder, called the combination “a dream deal” in a video presentation to the analysts and said he plans to buy another 6.4 million P&G shares to reach 100 million by late this year, when the sale is expected to close.

Cincinnati-based P&G will 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.

Shares sent soaring
News of the deal sent Gillette’s shares soaring $5.49, or 12 percent, to $51.17 in very heavy trading midday Friday on the New York Stock Exchange, while P&G’s fell $1.50, or 2.7 percent, to $53.82 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. As a result, the deal would ultimately be financed through about 60 percent stock and 40 percent cash.

The deal is a bold move by P&G Chief Executive A.G. Lafley, who has led the company out of dark times over 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 — Germany’s Wella AG hair care line in 2003 for $5.7 billion was the biggest acquisition until Thursday. P&G also acquired Clairol for its hair-care lines and Iams Co. for its pet foods.

Lafley said he was optimistic that the company would not be forced to divest many properties as part of an antitrust review. Speaking at the analysts’ presentation, he acknowledged that “there are some overlaps” of products, but that they were “relatively modest for a transaction of this size.”

The company reported strong quarterly earnings on Thursday, including a 12 percent jump in net income to $2.04 billion, or 74 cents per share, up from $1.8 billion and 65 cents per share in the same period a year ago.

P&G’s sales increased 7 percent to $14.45 billion in the quarter.

Gillette also has reported strong earnings since Kilts joined the company in 2001. It has moved to buoy its premium-line shaving and dental care products and sales of Duracell batteries.

In its most recent quarter, Gillette reported income of $475 million, up from $416 million, as more consumers traded up to its pricier M3Power razor and the series of hurricanes in the South boosted battery sales. Gillette also sells Oral B dental care products.