P&G buying Gillette for $57 billion

Saturday, January 29, 2005

NEW YORK -- 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 its 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, will also pick up Gillette's expertise in marketing to men.

The proposed merger announced Friday, if it meets shareholder and regulatory approval, would create a behemoth with more than $60 billion in revenue 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.

"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. He said he would rather lead a consolidation in consumer products makers than "get stuck with the leftovers."

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.

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 are 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 the analysts, and said he expected to increase his stake.

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.

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 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, 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.

Associated Press Writer Joe Kay in Cincinnati contributed to this report.

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