The Best Deal Gillette Could Get?
P&G’s Acquisition of Gillette
• The Proctor & Gamble Company, based
in Cincinnati, Ohio, is a worldwide
manufacturer and marketer of a wide
variety of consumer goods.
• In the year 1837, William Procter and
James Gamble create a new company:
Procter&Gamble, selling only soap and
• It operates in five segments: Beauty,
Health Care, Baby Care and Family
Care, Fabric Care and Home Care, and
Snacks and Coffee.
• In the year 1993, the company sales
reached $30 billion. It is the first time
for the company, that 50% of the sales
came from outside the U.S.
• The Gillette Company, Inc.
manufactures and sells shaving
systems for men. The company was
founded in 1901 and is based in
• 1904 King C Gillette receives the US
patent for razor with replaceable
• 1905 is the first successful year for
the company, because Gillette sold
90.000 razors and 12 million
• 1984 Gillette takes another big
partner in to the company. “ORAL B”,
the company of toothbrushes and
• In the year 1996 Gillette takes over
“DURACELL”, the company of big
• In the year 2004/2005 there are
some phrases about a big merger
with another big company.
21 “Billion Dollar Brands”
• Baby & Family Care
• Beauty Care
• Fabric & Home Care
• Oral Care
• Snacks & Beverages
• Blades & Razors
• Small Appliances
• Pet Food
• Health Care
Bounty, Charmin, Pampers
Olay, Pantene, H&S, Wella
Ariel, Downy, Tide
Gillette, Mach 3
Overview of the Companies
Why P&G Acquire Gillette?
• Gillette’s core customer segment
• The Gillette Company was the
market leader in several product
categories including blades &
razors, oral care and batteries.
• Gillette in the most recent quarter
before the acquisition Gillette
recorded income of $475 million,
making it a rich company.
• Gillette was strong in emerging
markets like India and Brazil
where P&G has been always
outperformed by Unilever.
• P&G skilled in marketing to
• Owned 150 brands.
• P&G expert in Chinese Market.
• P&G is already the world's largest
consumer products company, but
the addition of Gillette gives it
new clout with retailers,
including the world's largest, Wal-
The Unique Combination
• Remarkable similarities in organizational
• Highly complimentary brand, markets and
• Both companies going into great momentum going
into the merger.
• P&G and Gillette would have 21 brands with more
than $1 billion in annual sales each.
Comparison with other Acquisitions
Acquiror Target Transaction
Value ($ in
25/06/2000 Philip Morris Nabisco 19.2 69.9% 103.2%
22/08/1994 Johnson &
Neutogens 1.0 63.0% 76.3%
1.4 49.9% 52.3%
18/03/2003 P&G Welta 7.0 44.5% 47.3%
23/10/2003 Tchibo Beierdorf 13.0 51.2% 45.7%
06/06/2000 Unilever Bestfoods 23.7 44.4% 39.9%
04/12/2000 Pepsico Quaker Oats 15.1 22.2% 24.0%
Average 49.3% 55.5%
26/01/2005 P&G Gilllette 57.2 20.1% 20.1%
Modified All Stock Deal
P&G Rights Issue
Exchange with Gillette Stocks
$ 54.05/share, $57 bio
100% Gillette shares
for 0.975 P&G Shares
Got shares of P&G
$ 22 bio
Sell some shares of P&G,
Got cash $ 22 bio
Is $ 54.05 Fair?
1. Valuation based on public market reference
2. Valuation based on discounted cash flows:
b. +Cost saving: $56.60
c. +Total synergies: $61.90
3. Sum of the parts valuation: $52.5
The price is HIGH, but still in the
Ethics in Question
The Bankers: $ 30 mio each for
confirmation of the deal where they
got the money if the deal goes.
Got $164 mio
from the deal.
Past owner 10% of Gillette
Current owner of 3.5% of
It’s a Dream
Gillette’s stock price rose 50%
during Kilt’s tenure and
estimated wealth created
$ 20 bio.
Would this merger actually benefit shareholders, or was it
principally a wealth creation vehicle for Kilts?
1. Hybrid deal can bring big benefit for target’s shareholder with
2. Investment Bank is necessary for M&A deals.
3. Buffet’s blessing has strong influence.
4. CEO’s compensation should always be measured by the value
5. M&A can bring more power to negotiate with large retailers
6. Synergy opportunities in M&A: cost efficiency, increase
market power, complimentary R&D, etc.
Structure 0.975 Share of P&G for each share of Gillette
Consideration 100% Stock acquisition
Implied offer price $54.05 based on P&G closing price of $55.04 on Januari 26, 2005
Tax Treatment Tax Free Reorganization
Break up fee $ 1.9 Billion
Closing October 1, 2005
Share Repurchase P&G to repurchase $18 - $22 billion of P&G share by june 2008
Dilution Expected to be ditutive in 2006, break even in 2007, and accretive in 2008
Synergies More than $ 1 billion of cost synergies expected to be achieved over a 3 year
Enterprise value Approximately $57.2 billion, including $2.3 billion of gillette net debt
Offer & Transaction Values
P&G share price (26/01/2005) $55.44
Proposed exchange ratio 0.975x
Implied offer price per share $54.05
Total gillette share & option Outstanding 1.068.379
Gross Offer Value $57,750
Less : Option Proceeds (2,893)
Net offer value $ 54,857
Plus : Net Debt Assumed 2,321
Transaction Value $ 57,177
Severance and change in control benefits (Gillette officers)
Name and Principal
James M. Kitts,
Chairman, President and
$ 39,272,025 $ 164,532,192
Edward F. Degraen, Vice
29,711,715 15,655,483 45,367,198
Charles K. Hoffman, VP 16,258,040 10,174,097 26,432,137
Peter K. Hoffman, VP 10,695,578 9,567,625 20,263,203
Mark M. Leckle, VP 9,426,564 7,528,840 16,955,404
All Ohter Executive
Officers as a Group (12)
96,073,693 79,795,179 175,868,872
Term and Overview of the deal
Merger accomplished via an all equity deal PGI borrows and buy P&G share
Transaction followed by $18-$22 bn share
repurchase program over 12-18 months
(equivalent to 60-65% stock and 35-40% debt
Acquisition Co. (Parent subsidiary) exchange
P&G share for Gillette shares
$18-$22 bn of debt in P&G international (PGI).
Along with all international subsidiaries of P&G
Pericdicaily PGI exchange repurchased P&G
shares for shares of Gillette offshore
Transaction Financed with portion of cash By- july 2006 PGI will have borrowed $18-$22
bn, repurchased $18 - $22 bn of P&G stock and
exchanged it all for international subsidiaries of
Simultaneous announcement of buyback to
help support P&G stock price
Ongoing PGI debt will be supporied by all
international cash flows of the combines
Offshore antities receive their fair share of the
economic cost of the deal
All international business aligned to facilitate
business synergies and efficiencies 19
• The offer valued Gillette's shares at about $54 a share.
• Gillette shares held in the Buy DIRECT Plan, including dividend
reinvestment shares, are being automatically converted into the
P&G Shareholder Investment Program (“SIP”) at the 0.975 rate.
• Gillette shares held in the Direct Registration System (“DRS”) are
being automatically converted into whole shares of P&G common
stock in DRS form.
• Shareholders of both companies overwhelmingly approved P&G's
acquisition of Gillette that would form the world's largest consumer
products company, with such brands as P&G's Pampers and
Gillette's line of razors. In announcements at separate special
meetings, the companies said 96 percent of the shares that were
voted favored the merger.
• News of the deal sent Gillette’s shares soaring $5.49, or 12
percent, to $51.17 in very heavy trading on the New York Stock
Exchange, while P&G’s fell $1.50, or 2.7 percent, to $53.82 also on
• On Wall Street, shares in Gillette closed up nearly 13% , while
P&G slid 2.1%.
• Involved 6,000 job cuts, 4% of the combined workforce of
140,000. Company expected to reap $14 Billion in cost savings.
• Mr. Buffett owns about 33% of Berkshire Hathaway which in part
owns 10% of Gillette. And at the end of the merger, he would be
receiving 93million shares of the new company.
• Regulatory Concerns: P&G’s focus on more valuable brands has
led to it shedding a number of ailing lines. It has sold off Sunny
Delight, Sure deodorant and several detergents, and there is
speculation that Lafley will soon dispose of underperforming
brands from the Gillette business.
Deal Structure Alternative
All Cash •Efficient
• Capital gain tax
• Use company’s cash reserve
•Impact bond rating & stock
All Stock •No tax
•Do not impact company’s
•Not tranparent (gain not
•Dilution of share values
Hybrid Both plus & minuses
• 0.975 shares of P&G for each share of Gillette
• Price 54.05 on P&G closing price of $55.44 on 26 Jan-05
(20.1% premium to Gillette share price of $45)
• Stock buyback of $ 18-22 bio for 18 months
• By the end of 18 months, the transaction will be: 60%
stocks & 40% cash
• The deal: $57 bio
• Break-up fee $ 1.9 bio (3% transaction)
• No collar