P&G to buy Gillette for $57 billion

Procter & Gamble Co. said yesterday it would buy Gillette Co. for about $57 billion in stock, uniting two iconic US producers of household goods ranging from Pampers diapers to Duracell batteries.

The combined company would boast more than $60 billion in annual revenues, giving it increased leverage at stores ranging from discounters to grocers.

The maker of Tide is paying an 18 per cent premium for Gillette, best known for its razors. P&G promised cost cuts of up to $16 billion, heralded lay-offs of four per cent of the combined 140,000 workforce and set a stock buyback of up to $22 billion in the next 18 months.

The news spurred a rise in shares of European consumer goods companies such as French pen, lighter and razor maker Bic and UK household cleaning goods maker Reckitt Benckiser, on speculation the deal could spark merger activity in a sector long believed ripe for consolidation.

Retailers, led by discounter Wal-Mart Stores Inc., have pressured consumer products makers to keep prices low, pinching profits.

"That is a hell of a big deal and it gets people thinking that Unilever or others could go back on the acquisition trail," said one dealer in Paris, adding that Bic would be an obvious target. Colgate-Palmolive Co. might eye Reckitt, traders said.

By 0850 GMT, Reckitt shares were up 3.4 per cent at 1,593 pence. Bic jumped 6.8 per cent to €42.34 and Anglo-Dutch Unilever gained 0.9 per cent to 496 1/2p.

In Davos, EU antitrust chief Neelie Kroes said she expected to review the planned deal by P&G and Gillette.

P&G, which discussed the tie-up with analysts and investors yesterday morning in New York, also raised its annual sales growth target to five to seven per cent, up from four to six per cent.

The transaction has the support of billionaire investor Warren Buffett, whose Berkshire Hathaway Inc. has a nine per cent stake in Gillette. Mr Buffett said in a statement he would raise his holding in the combined company by seven per cent to 100 million P&G shares, a $350 million investment at current prices.

"This merger is going to create the greatest consumer product company in the world," Mr Buffett said. "It's a dream deal."

It would be the largest transaction since J.P. Morgan Chase & Co. purchased Bank One Corp. for $56.8 billion last January, according to research firm Dealogic.

P&G, based in Cincinnati, is swapping 0.975 shares of its stock for each Gillette share. That values Boston-based Gillette at $53.94 per share, an 18 per cent premium to its closing stock price on Thursday.

The price values Gillette at 28 times projected 2005 earnings, a 40 per cent premium over rival Colgate's price earnings ratio of 20 and double the PE of battery maker Energizer Holdings Inc.

P&G plans to buy back between $18 billion and $22 billion of the company's stock within the next 18 months - about one 10th of the companies' combined market value. The buyback means that P&G essentially is buying Gillette for 60 per cent stock and 40 per cent cash, the company said.

P&G said it would achieve revenue and cost synergies between $14 billion and $16 billion from the transaction, which would also result in the loss of about 6,000 jobs, or four per cent of the firms' combined 140,000 workforce.

Gillette reported just over one billion shares outstanding as of October, giving the transaction a total equity value of $54 billion. P&G said the deal carried a value of $57 billion but did not explain the difference.

The deal would give P&G strength in categories where it currently has little presence, including shaving supplies, where Gillette ranks No. 1 worldwide. It also expands its retail shelf space, possibly giving it more leverage in price negotiations.