Consumer Shakeup: Procter & Gamble Swallows Gillette

Procter & Gamble's acquisition of Gillette extends the consumer product firm's dominance in the tooth-whitening category.

The $57 bil. deal gives P&G access to Gillette's Rembrandt oral care business and the whitening category's current number two player, according to IRI, Inc. data. Gillette has aggressively promoted the brand since acquiring it from Den-Mat last March (¹ (Also see "Gillette Enters Tooth Whitening Market With Rembrandt Acquisition" - Pink Sheet, 29 Mar, 2004.), p. 9).

The Rembrandt line includes Whitening Strips and Whitening Pens , both of which have been integrated with Gillette's Oral-B toothbrush brand. P&G's market-leading whitening line includes Crest Whitestrips , Whitestrips Premium and Night Effects .

P&G whitening sales were relatively flat at $192 mil. at food, drug and mass retailers (excluding Wal-Mart) for the 52 weeks ended Dec. 26. Still, the firm controls roughly 70% of the market, according to IRI. Rembrandt sales increased 43% to $31 mil., giving Gillette an 11% market share.

Colgate-Palmolive, P&G's closest competitor and manufacturer of Simply White , will become a distant second in the category following conclusion of the deal. Colgate's whitening sales dropped 63% to $28 mil., IRI shows.

P&G will move quickly to integrate the newly acquired oral care franchise, CEO A.G. Lafley said at a Jan. 28 conference announcing the deal in New York City.

"In oral care, we're going to have to think about how we put a great brush business together with a great dentifrice business," Lafley remarked.

"There are lots of opportunities to work together on the innovation that we have in hand and the technologies we have in hand," he maintained. "There are an awful lot of opportunities for us to go to market and build these brands and build consumption and market share."

P&G also hopes to take advantage of Gillette's retail muscle to "strengthen our relationships with winning retail customers around the world."

"Gillette has a fantastic in-store presence and retail capability," Lafley explained. "Nobody in the world gets more in-store point-of-purchase displays than Gillette."

The combined entity "can leverage P&G's strong customer business development approach with Gillette's outstanding execution at store level," Lafley claimed.

The $57 bil. transaction is roughly six times Gillette's 2003 annual revenues of $9.25 bil. and represents an 18% premium to Gillette shareholders based on the stock's Jan. 27 closing value.

The hefty price tag indicates the degree to which mass retailers have been squeezing consumer product suppliers on pricing. P&G hopes Gillette will better position it to deal with Wal-Mart and other large retailers.

The acquisition, the largest in P&G's history, will create a company with combined sales of more than $60 bil. and a portfolio that includes 21 billion-dollar brands. It also represents an ongoing shift in the firm's product stable toward key product segments, as well as its strategy to further penetrate developing markets.

Healthcare, personal and beauty care now will represent half of P&G's product portfolio, up from the 30% range.

"The addition of Gillette's brands accelerates the evolution of P&G's portfolio into faster growing, higher margin and more asset-efficient health, personal care and beauty businesses," Lafley said.

Within P&G, the distinguishing factors between healthcare and businesses such as personal and beauty care is increasingly blurred, Lafley claimed.

"We don't think about healthcare as just regulated drugs; we don't just think about it as pharmaceutical drugs or even over-the-counter drugs," Lafley explained. "We think about what we call 'consumer healthcare,' which is unregulated."

Given category overlap, the Gillette acquisition will improve P&G's product innovation and R&D through "a lot of collaboration, a lot of what we call 'connect and develop,'" Lafley said.

"We will build an even stronger innovation pipeline across a more diverse and profitable mix of categories and brands," he maintained. "We'll also bring greater shopper knowledge and broader and deeper expertise in both men's and women's marketing."

Developing markets represent a "significant opportunity" for the combined firm with projected profit growth of 5%-6% over the next five years.

"We believe we can help Gillette brands take further advantage of this growth by achieving deeper market penetration in critical markets like China and Russia, Mexico and Turkey," he said.

P&G expects the deal to generate revenue and cost synergies totaling $14 bil.-$16 bil. annually as the firm leverages organizational structure, removes duplicate costs and drives efficiencies, according to CFO Clayt Daley.

The firm anticipates $10 bil.-$11 bil. to derive from cost savings in areas such as purchasing, manufacturing, logistics, improved asset use and coordinated procurement.

P&G plans to reduce combined administrative costs by eliminating overlap, delivering key support functions through its global business services group and integrating Gillette brands with minimal additional staff, Daly added.

The company expects to cut 6,000 jobs, representing 4% of P&G's combined 140,000 employees. Gillette management will have "an equal opportunity," Daley maintained, with a number of headcount reductions to come within P&G's own ranks.

Anticipated savings from material purchasing and marketing expenses, including media buying, will be "recognized fairly quickly," Daley noted. "Synergies in other areas will take a little longer."

The other $4 bil.-$5 bil. in savings will be generated by a one-point acceleration in top-line sales growth, largely by leveraging P&G's developing market infrastructure, Daley said.

The deal is expected to close in the fall after approval by shareholders and regulators. With substantial product overlap in oral care and deodorants, P&G could be required to divest some brands before the acquisition receives regulatory clearance.

Gillette CEO James Kilts will oversee the integration process and serve as vice chairman on P&G's board of directors.

On the financial side, P&G's healthcare net sales grew 7% to $2 bil. in the firm's second fiscal quarter, driven by volume gains for Prilosec OTC and double-digit growth in developing markets.

Net earnings dropped 4% to $313 mil. primarily due to a strong comparison period that included the launch of Crest Whitestrips Premium, as well as strong Vicks brand sales due to an early cough/cold season in the U.S.