The $54 billion deal that would link consumer products giants Procter & Gamble Co. and Gillette Co. is designed to bolster P&G’s presence in the men’s personal care products market. P&G, with its Clairol, Olay, CoverGirl, and other personal care brands, traditionally has focused on women’s items. Picking up such men’s brands as Gillette razors and blades, Right Guard deodorants and hair care products, Braun electric shavers, and Duracell batteries is an attractive proposition for P&G because those products are growing faster than those in the buyer’s own stable, says Douglas Christopher, an analyst at Crowell Weedon & Co. “The Gillette brands are growing at between 6% and 12%, so that’s a lot of free cash flow that will accrue to P&G,” he adds. The deal combines the No. 1 and the No. 5 U.S. household goods companies with, when combined, more than 140,000 employees and annual sales exceeding $60 billion. While the deal adds scale and distribution strength, it means that the P&G portfolio will swell from 16 brands to 22 with $1 billion in sales. As a result, analysts have started to speculate on which holdings may become “non-core.” “You don’t get the feeling that P&G is as interested in the Duracell and Braun divisions as it is in the blades and razors business,” notes Lauren DeSanto, a Morningstar analyst. She sees these divisions as potential divestitures, and pegs battery manufacturer Energizer Holdings Inc. as a possible buyer for Duracell. The deal likely will accelerate P&G’s interest in shedding two of its food brands – Folger’s coffee and Pringle’s potato chips, she adds. “Since the food businesses represent only 3.2% of net sales, it doesn’t seem that they are key to P&G’s long-term strategy.” Rather, she says, the company is moving toward higher-margin products to which it can add value by adding relatively inexpensive components. A number of companies could vie for Pringles, she notes, because, at a 10% market share, a buyer likely wouldn’t set off antitrust alarms. But the Folger’s line, with a 31% share, would be a more difficult buy for a coffee producer. Naturally, P&G competitors such as Unilever and Colgate-Palmolive Co. will be reviewing their strategies in the wake of the P&G/Gillette hookup. Even before buying Gillette, P&G had surpassed the Unilever group of companies in sales, so the pressure on the British/Dutch organization’s management to take action had been ratcheted up. Unilever, which makes Dove soap and Surf detergent, recorded 2003 sales of $54 billion, but many of its brands aren’t growing and it, too, has been trimming off peripherals. DeSanto, however, thinks that Unilever is unlikely to react to P&G’s deal with a blockbuster of its own. She cites an inefficient management structure as an impediment to any major dealmaking by the company, for the moment. Yet, even as deal observers applaud the broadening of P&G’s product line, some believe that the company overpaid for Gillette. “It does look like P&G’s price was a little rich, but they’ve had a tendency to overpay for acquisitions,” DeSanto says. “If P&G ends up divesting brands like Braun and Duracell and doesn’t get a fully valued price for them,” she adds, “that would be the worst of both worlds.” P&G’s biggest deal before Gillette was the $5.7 billion acquisition of German hair-care giant Wella AG in 2003. In the past six years, it also has acquired pet food maker Iams Co. for $2.3 billion and the Clairol hair care products line of Bristol-Myers Squibb Co. for $5 billion. While DeSanto says it’s too early to evaluate the Wella acquisition, she says there have been signs that the Clairol integration hasn’t been going smoothly. “With Clairol, they really haven’t gotten the margin expansion they were looking for.” She adds that if P&G is having problems integrating a hair care brand, which sells in a market the company knows well, some time might be needed to successfully integrate new product areas like razors and blades. On a positive note, Christopher believes that Gillette’s savvy as an international marketer will help P&G increase its ability to sell its existing brands abroad. “Gillette does a lot more business overseas than P&G does, so we’re looking for a shot in the arm from the deal for P&G’s international operations.” However, he says he’s less sure about what many commentators see as a prime deal driver – more leverage in dealing with big-box retailers. “On the whole, I’d say that the acquisition does give P&G more leverage with Wal-Mart, but if a store isn’t carrying the products people want, they’ll go elsewhere.” He adds that, in his opinion, the perceived need to bulk up in order to negotiate more effectively with Wal-Mart has been overemphasized. Copyright 2005 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com

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