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Procter gamble merged gillette biggest consumer products company { January 28 2005 }

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January 28, 2005
Procter Reaches $57 Billion Deal to Buy Gillette

Procter & Gamble, the consumer products company, announced today that it had reached an agreement to acquire the Gillette Company, the shaving-products and battery maker, for about $57 billion in stock.

In a statement on its Web site today, Procter & Gamble said the deal, which is subject to approval by regulators and shareholders, is expected to close next fall.

"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," the chief executive of Procter & Gamble, A. G. Lafley, 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," he added.

James M. Kilts, chief executive of Gillette, who will join Procter's board, said: "This marks the realization of an historic next phase of great opportunity for Gillette and also for P & G. It brings together two companies that are complementary in their strengths, cultures and vision to create the potential for superior sustainable growth."

"This merger is going to create the greatest consumer products company in the world," Warren E. Bufffet, chief executive of Berkshire Hathaway Inc., Gillette's largest shareholder, said in a statement. "It's a dream deal."

He said that he intended to increase his holdings to 100 million shares in the combined company. Berkshire Hathaway currently holds 96 million shares of Gillette, or 9.67 percent of the company.

The merger will create a consumer-products powerhouse, combining some of the world's best-known brands like Procter's Tide, Crest and Pampers with Gillette's razors and blades, Right Guard deodorant and Duracell. The combined company would have sales of more than $60 billion a year.

The agreement, which the boards of both companies approved late yesterday, will officially be announced today at a news conference in Midtown Manhattan.

The friendly transaction reflects just how much the balance of power has shifted from consumer-products makers to giant discount retailers, mainly Wal-Mart, in recent years.

The move is a bid by two venerable consumer-products giants to strengthen their bargaining position with the likes of Wal-Mart and Aldi in Europe, which can now squeeze even the largest suppliers for lower prices. In addition, both companies have faced growing pressure on profits from private labels as consumers have become more price-conscious and less brand-conscious.

The combined company, analysts say, will also have more power in its negotiations with media companies - television, magazines, newspapers and billboards - to buy billions of dollars a year in advertising. Last year, Procter spent $5.5 billion on advertising.

Both Gillette, based in Boston, and Procter, based in Cincinnati, have started down this road at least once before. Five years ago, when Procter's sales were temporarily stagnating as new products floundered, Durk Jager, then the chief executive, broached the possibility of a merger with Gillette executives and was rebuffed. In the current round of talks, the overture came from Gillette. In December, Mr. Kilts approached Procter, according to executives close to the negotiations. Mr. Lafley will continue as the chief executive of Procter.

The Procter-Gillette merger would be the largest acquisition in the nation since J. P. Morgan Chase acquired Bank One for $60 billion last year and it is the latest in a raft of mergers in the last several months that have swept across corporate America as boardroom confidence has surged.

Last month was the busiest December in history, with a total of $283.7 billion in mergers and acquisitions worldwide, outpacing the deal volume in December 1999, at the height of the stock market bubble and merger mania, according to Thomson Financial.

Last month, Sprint agreed to buy Nextel Communications for $35 billion; Johnson & Johnson made a deal to acquire Guidant for $25 billion; Symantec agreed to buy Veritas for $13.5 billion; PeopleSoft finally capitulated to Oracle's $10.3 billion offer; and I.B.M. sold its personal computer business to Lenovo of China for $1.75 billion. And this week, SBC Communications is negotiating to buy AT&T, according to executives close to the deal.

Regulators are expected to look closely at the Gillette-Procter merger and could force Procter to divest itself of some businesses that overlap with Gillette's. The greatest overlaps are in the deodorant and oral health care segments. In deodorants, Procter owns Old Spice and Gillette owns Right Guard; in oral health, Procter owns Crest toothpaste and Gillette owns Oral-B.

The merger, management specialists say, combines two companies in similar markets requiring complementary skills.

"These are companies with storied brands that work the same distribution channels," said Eric Greenberg, an independent management consultant in New York. "This sounds like a very viable merger; they are sticking to their knitting."

Over the years, major investors have regarded Gillette as a company with an enviable stable of brands with the potential to become even more lucrative. In the late 1990's, the leveraged buyout firm Kohlberg Kravis Roberts & Company took a large holding in Gillette, but sold its shares after Gillette's profits slipped in 1999.

Shares of Procter closed down 12 cents yesterday at $55.32; Gillette shares closed up 85 cents, at $45.85.

Procter apparently also sees untapped potential in Gillette, as its products can now be pushed hard by Procter's renowned marketers, both in the United States and abroad. Procter, in particular, sees great opportunity abroad.

In a conference call last month, Procter executives said the total market in developing countries for its lines of consumer goods would reach nearly $100 billion by 2010.

"For our top brands, there are still lots of markets where we don't compete," Robert A. McDonald, vice chairman for global operations, said in the conference call.

In talks leading up to the merger, Procter and Gillette executives say they have also identified more strategic advantages than merely the greater size, buying power and efficiencies from combining two similar enterprises.

In many ways, they say, the companies have complementary skills. Procter's executives regard their company as a master at marketing to women, given its long history in household, hygiene and food products. Gillette, whose name is synonymous with shaving for millions of men, sees itself as an expert in the male market.

In addition, Procter has established a strong sales network in fast-growing foreign markets like China and Russia, while Gillette has not. Tapping that distribution network, the executives say, should lift Gillette's worldwide sales at little added cost to the combined enterprise.

Indeed, executives of the two companies have identified $14 billion to $16 billion in annual benefits from the merger, a total that includes the gains from a stronger bargaining position with retailers and media companies, cost-cutting and anticipated additional revenues. Combining the companies is expected to lead to about 6,000 job cuts, or about 4 percent of the work force. Procter has 110,000 employees and Gillette has 29,400 workers.

Under the terms of the deal, Procter will pay 0.975 share, or about $54, for each share of Gillette. That is about an 18 percent premium over Gillette's shares. After the deal is completed, Procter intends to buy back $18 billion to $20 billion worth of stock from the combined company, the companies said in a joint statement. That would have the effect of making the acquisition a 60 percent stock and 40 percent cash deal.

Procter & Gamble reported second-quarter earnings yesterday that rose 12 percent. Net income was $2.04 billion, compared with $1.82 billion a year earlier. Sales in the quarter, which ended Dec. 31, rose 9.3 percent, to $14.45 billion.

In October, Gillette reported earnings of $475 million in the third quarter, compared with $416 million last year. Over all, Gillette's quarterly sales reached $2.69 billion, up from $2.4 billion the year before.

Gillette was advised by UBS and Goldman Sachs and received legal counsel from Davis Polk & Wardwell. Procter was advised by Merrill Lynch and received legal counsel from Cadwalader, Wickersham & Taft.

Eric Dash contributed reporting for this article.

Copyright 2005 The New York Times Company

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