By  on January 31, 2005

NEW YORK — Procter & Gamble’s deal to acquire the Gillette Co. for about $57 billion is intended to boost the competitive edge of both companies in the beauty, health and personal care industries, which will account for 50 percent of P&G’s portfolio.The prize component for P&G (the combined consumer-products colossus would have more than $60 billion a year in sales) is Gillette’s almost bulletproof razor and blades business.  Some retailers — including Wal-Mart — may have misgivings about the union, said consumer products analyst Bill Chappell of SunTrust Robinson Humphrey. A larger P&G, already the category captain across several beauty and personal care categories, could shift the balance of power between retailers and suppliers that now tips in favor of retailers who push for lower prices.“The addition of Gillette’s brands accelerates the evolution of P&G’s portfolio in the faster-growing, higher-margin and more asset-efficient health, personal care and beauty business,” Alan G. Lafley, chairman and chief executive officer of Cincinnati-based P&G, said during an earnings call with investors. Gillette gives P&G a total of 21 brands with sales of $1 billion to $5 billion. “Combined, we are the market leader in categories that represent two-thirds of total company sales,” Lafley said.  P&G agreed to exchange 0.975 share of common stock for each share of Gillette common stock. In the next 12 to 18 months, P&G plans to buy back between $18 billion and $22 billion of its common stock, resulting in a financing structure of about 60 percent stock and 40 percent cash. P&G shares closed at $54.27, up 1.86 percent, in New York Stock Exchange trading. Boston-based Gillette closed at $51.79, up 13.35 percent.  The deal has been approved by the board of directors at both firms, but must still be approved by regulators and shareholders.“It’s a dream deal,” said Warren Buffett, chairman of Berkshire Hathaway, Gillette’s largest stockholder. Berkshire Hathaway holds 96 million shares of Gillette, the equivalent of 93.6 million shares of P&G.“P&G feels like it knows women,” said Chappell. The Gillette Venus brand, which this spring will introduce Venus Vibrance — the sister razor to the battery-operated M3Power — has amassed sales of $2 billion since it hit the market in 2001. Gillette has had success encouraging its male and female customers to trade up to new, higher-priced offerings, such as the $14.99 M3Power, a $6 premium over the Mach3 Turbo; and the $11 Venus Vibrance, $3 more than the original Venus razor. P&G has employed a similar strategy, particularly in its oral care business. The firm has moved consumers from manual toothbrushes to its battery-operated Crest SpinBrush, and built incremental sales by carving out new categories with Crest Whitestrips.Gillette’s blades and razors business accounts for more than 40 percent of company sales, which are projected to reach $10.3 billion in 2004, making it an estimated $4.1 billion entity.  Lafley said Gillette’s market growth will likely contribute 3 percent to the combined businesses, compared with just over 2 percent for P&G alone.P&G has a record of making an indelible mark on product categories it enters. In four years, the company has generated about $5 billion in retail sales in new categories, Lafley said.  Both companies have worked to widen their leads over competitors with shortened product launch cycles, multimillion-dollar marketing campaigns and impressive market execution.James Kilts, Gillette’s chairman, ceo and president, will join P&G’s board of directors where he will serve as vice chairman. Kilts said he has agreed to stay in the new job for a least a year to lead integration efforts.

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