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P&G’s Acquisition of Gillette

Analysis of P&G's Acquisition of Gillette in 2005.

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P&G’s Acquisition of Gillette

  1. 1. Business Case The Best Deal Gillette Could Get? P&G’s Acquisition of Gillette Ardo Alexander Sanjaya Susanto 1
  2. 2. P&G Background • 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 candles. • 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. Logo produk2 2
  3. 3. Gillette Background • The Gillette Company, Inc. manufactures and sells shaving systems for men. The company was founded in 1901 and is based in Boston, Massachusetts. • 1904 King C Gillette receives the US patent for razor with replaceable blade. • 1905 is the first successful year for the company, because Gillette sold 90.000 razors and 12 million blades. • 1984 Gillette takes another big partner in to the company. “ORAL B”, the company of toothbrushes and mouth care. • In the year 1996 Gillette takes over “DURACELL”, the company of big batteries. • In the year 2004/2005 there are some phrases about a big merger with another big company. 3
  4. 4. 21 “Billion Dollar Brands” • Baby & Family Care • Beauty Care • Fabric & Home Care • Oral Care • Snacks & Beverages • Blades & Razors • Batteries • Small Appliances • Pet Food • Health Care  Bounty, Charmin, Pampers  Olay, Pantene, H&S, Wella  Ariel, Downy, Tide  Crest, Oral-B  Folgers, Pringles  Gillette, Mach 3  Duracell  Braun  IAMS  Actionel 4
  5. 5. Overview of the Companies Net Sales (12/31/2004) $51.407 $10.477 Assets (12/31/2004) $57.048 $10.731 Stock Price (01/26/2005) $55,44 $45,85 5
  6. 6. Why P&G Acquire Gillette? • Gillette’s core customer segment was men. • 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 women. • 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- Mart. 6
  7. 7. The Unique Combination • Remarkable similarities in organizational structure. • Highly complimentary brand, markets and technologies. • Both companies going into great momentum going into the merger. • P&G and Gillette would have 21 brands with more than $1 billion in annual sales each. 7
  8. 8. Comparison with other Acquisitions Announceme nt date Acquiror Target Transaction Value ($ in billions) Premium to share price (1 day prior) Premium to share price (1 week prior) 25/06/2000 Philip Morris Nabisco 19.2 69.9% 103.2% 22/08/1994 Johnson & Johnson Neutogens 1.0 63.0% 76.3% 03/11/2004 Constellation brands Robert Mondayl 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% At 0.975x exchange ratio 26/01/2005 P&G Gilllette 57.2 20.1% 20.1% 8
  9. 9. Transaction Multiplies Gillette Result Gillette Multipies P&G Market MultipiesMarket $45.00 Offer Price $54.05 Revenue 12/2004A (LTM) $10,366 4.6x 5.5x 3.0x 06/2005E $10,581 4.5 5.4 2.9 EBITDA 12/2004A (LTM) $3,013 15.8x 19.0x 13.1x 06/2005E $3,149 15.1 18.2 12.4 P/E 06/2005E $1.78 25.2x 30.3x 21.3x 06/2006E $2.01 22.4 26.9 19.3 9
  10. 10. 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 (no collar) P&G Shareholders Stocks Diluted Gillette Shareholders Got shares of P&G Stock Buyback $ 22 bio 1 2 P&G Shareholders Stocks Undiluted P&G/Gillette Shareholders Sell some shares of P&G, Got cash $ 22 bio TAX 10
  11. 11. Is $ 54.05 Fair? 1. Valuation based on public market reference points: $43.25-45.00 2. Valuation based on discounted cash flows: a. $47.10 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 acceptable range. 11
  12. 12. Ethics in Question The Bankers: $ 30 mio each for confirmation of the deal where they got the money if the deal goes. James Kilts Got $164 mio from the deal. Warren Buffet Past owner 10% of Gillette Current owner of 3.5% of P&G It’s a Dream Deal 12 Gillette’s stock price rose 50% during Kilt’s tenure and estimated wealth created $ 20 bio.
  13. 13. Solution Would this merger actually benefit shareholders, or was it principally a wealth creation vehicle for Kilts? Merger Announcement 27 Jan-05 $84.92 23 Mar-15 13
  14. 14. Lesson Learned 1. Hybrid deal can bring big benefit for target’s shareholder with minimum tax. 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 he/she creates. 5. M&A can bring more power to negotiate with large retailers (Wal-Mart). 6. Synergy opportunities in M&A: cost efficiency, increase market power, complimentary R&D, etc. 14
  15. 15. Thank You * AG Lafley, P&G CEO 15
  16. 16. Transaction Summmary 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 period Enterprise value Approximately $57.2 billion, including $2.3 billion of gillette net debt assumption 16
  17. 17. 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 17
  18. 18. Severance and change in control benefits (Gillette officers) Name and Principal position Net Equity Award All Other Payments and Benefits Estimated Aggregate Dollar Value James M. Kitts, Chairman, President and CEO $125,260,16 7 $ 39,272,025 $ 164,532,192 Edward F. Degraen, Vice Chairman 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 18
  19. 19. Term and Overview of the deal Rationale Process 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 financed acquisition) 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 and Gillette Pericdicaily PGI exchange repurchased P&G shares for shares of Gillette offshore subsidiaries 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 Gillette 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 entities. Offshore antities receive their fair share of the economic cost of the deal All international business aligned to facilitate business synergies and efficiencies 19
  20. 20. • 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. 20
  21. 21. • 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 the NYSE. • 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. 21
  22. 22. Deal Structure Alternative Plus Minus All Cash •Efficient •Transparent (immediate recognizable gain) • Capital gain tax • Use company’s cash reserve •Impact bond rating & stock price All Stock •No tax •Do not impact company’s leverage •Not tranparent (gain not easily calculated) •Dilution of share values Hybrid Both plus & minuses 22
  23. 23. P&G’s Offer • 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 Other Notes: • Break-up fee $ 1.9 bio (3% transaction) • No collar 23

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