Procter & Gamble (P&G) yesterday agreed to buy Gillette for $57 billion (€43.7 billion) in a deal that could unleash a fresh round of consolidation in the consumer products industry.
The agreed transaction, if completed, would be the largest in the industry to date. It would create a company with about $60 billion in revenues and unite some of the world's best-known consumer brands, from Tide soap powder to Duracell batteries.
It also signals a bet by P&G and Gillette that the next wave of growth in the sector must come from winning global scale and developing higher-margin new products. Margins in the industry have been forced down by rising commodity prices and increasingly powerful retail customers such as Wal-Mart.
Mr Gary Stibel, chief executive of the New England Group consultancy, said: "It leaves many [ rival] companies up against the wall. They must now figure out ways to become one of the two or three major global players."
According to Mr Jim Kilts, the chief executive of Gillette who initiated the merger talks: "The consumer products industry needs to consolidate and I would rather lead that consolidation than get stuck with the leftovers at the end."
Mr Kilts has agreed to stay on for one year to oversee the integration.
The deal was blessed by Mr Warren Buffett, the chief executive of Berkshire Hathaway, Gillette's largest shareholder. "It's a dream deal," he said.
Mr Buffett pledged to increase Berkshire's holding in the merged group.
The combination, which overtakes Anglo-Dutch rival Unilever by market capitalisation and revenue, brings together P&G's strengths in beauty and personal care with Gillette's shaving and deodorant brands.
Mr Alan G. Lafley, P&G's chief executive, who has engineered a four-year turnround at the Ohio-based company, said both groups could now grow together "at levels that neither could sustain on its own".
The new company would raise operating margins from P&G's current level of 19-20 per cent to 24-25 per cent by the end of the decade, he said.
The companies expect to achieve $14-$16 billion in cost savings over three years by co-ordinating purchasing and logistics. They expect 6,000 job losses.
The deal, which is the largest US transaction since JP Morgan bought Bank One for $58.6 billion last January, spurred a 12 per cent rise in Gillette's share price to $51 in early trading.
P&G shares were down 2.6 per cent, a relatively positive investor reception for such a large deal.
Gillette shareholders will receive 0.975 common shares in P&G for every share they own, valuing the company at an 18 per cent premium to Gillette's closing share price on Thursday.
P&G will buy back $18-$22 billion of its shares over the next 12-18 months, which it said essentially meant buying Gillette for about 60 per cent stock and 40 per cent in cash.
UBS and Goldman Sachs advised Gillette. Merrill Lynch advised P&G. The takeover could bring in close to $100 million in fees for the banks.
Fees on merger transactions are not often disclosed, but the disclosed fees on M&A deals worth more than $50 billion since 1999 averaged around 0.17 per cent of the transaction value,according to data from finance industry provider Dealogic.
On this basis, fees for the Gillette deal could run to $100 million, but how much the banks get ... varies with each individual deal based on a variety of factors. - Financial Times Service, Reuters
