With a wary eye on Madison Avenue and Wal-Mart headquarters in Bentonville, Ark., Procter & Gamble Co. is making a $57-billion (U.S.) bet that buying Gillette Co. will give it unparalleled clout over retailers, media companies and rivals.
The proposed stock and cash deal, creating a global dog-food-to-deodorant powerhouse, is expected to unleash a wave of similar takeovers among the companies whose offerings line the shelves of mighty retail giants, such as Wal-Mart Stores Inc.
Hinting at the upheaval to come, Gillette chief executive officer Jim Kilts said yesterday that size matters as the industry remakes itself to level the playing field with retailers and succeed in tough emerging markets such as China.
"I believe the consumer product industry needs to consolidate," Mr. Kilts said bluntly in New York as the deal was announced.
"I'd rather lead it than end up with the leftovers."
Cincinnati-based P&G, already the largest consumer products company in the United States, would vault past Anglo-Dutch giant Unilever NV to become No. 1 in the world.
Together, P&G and Boston-based Gillette will have annual sales of more than $60-billion.
The combination puts some of the world's best-known brands under one roof: P&G's Crest, Tide, Pringles and Tampax alongside Gillette, Duracell, Braun and Oral-B. Analysts praised the fact there is relatively little product overlap because P&G sells a lot of women's items, while Gillette's signature shaving products are bought mostly by men.
Both companies are already big, boasting leading products in key categories. But with the growing size and global power of mega-retailers, particularly Wal-Mart, analysts said P&G had little choice but to grow, too.
"It's hard to throw your weight around in Bentonville," said Fred Dalzell, a Boston-based management consultant and co-author of an authorized book on P&G strategy, Rising Tide: Lessons from 165 Years of Brand Building at Procter & Gamble. "Everyone has trouble there."
Some analysts decried the "exorbitant" price P&G is paying -- an 18-per-cent premium over Gillette's closing share price Thursday and more than 50 per cent higher than the average stock market value of consumer product companies.
But experts said that with size, comes clout. And with Gillette, P&G is adding to a potent roster of international brands that most consumers apparently can't live without, whether they shop at Wal-Mart or anywhere else.
"Suppliers need to either get big or get focused in order to maintain leverage in an industry marked by retailer consolidation," CIBC World Markets analyst Joseph Altobello told clients in a research report.
The key for consumer product companies, according to Mr. Dalzell, is to develop much-coveted $1-billion brands -- individual items that generate retail sales of at least $1-billion. And with Gillette's brands, P&G would boast 21 of these, or more than anyone else.
"Procter & Gamble has learned over the 20th century that it's better to have one or two huge brands than a whole lot of lesser brands, even if that means giving up some market share," Mr. Dalzell said. "They aren't just growing for the sake of growing. They are really trying to think strategically."
Brands worth $1-billion give firms clout and economic efficiency from the lab and the boardroom to the grocery store aisle. P&G estimates it will generate savings of up to $16-billion, including job cuts totalling about 6,000 out of a combined work force of 140,000.
Size means better shelf space in stores, more leverage with broadcasters and magazine publishers for advertising, and likely better sales and profit margins as well, analysts said.
"Shelf space is diamond-encrusted gold," retail analyst Kurt Barnard said. "It's exposure to the consumer and everyone wants exposure to the consumer. They each had a lot of economic power before, but with the marriage they'll have a lot more power, power to get shelf space, preferred positions, all of that."
Wal-Mart, for example, has a reputation of being the toughest negotiator in the retail business, pressing suppliers for concessions and ever-lower prices.
Now, when P&G brand managers walk into the little glass-enclosed negotiating pens that line the halls of Wal-Mart headquarters, they'll know they're also No. 1 in the world.
In spite of the uncertainty, P&G employees in Canada see the marriage of the two companies as a marketers' dream.
"We're all delighted. . . . It's such a perfect complement to our business," Tim Penner, president of Procter & Gamble Canada Inc., said in an interview yesterday.
It is not yet clear how many jobs may be lost in Canada, where P&G has roughly 1,900 employees and Gillette has 207 and, Mr. Penner said, "it is way too premature to speculate on the specific integration plan."
Nearly 850 employees work at P&G's Toronto head office. It also has plants in Belleville, Ont., and Brockville, Ont., as well as distribution centres in Mississauga, Cambridge, Ont., and Hamilton.
The Belleville plant produces Always feminine pads and Olay facial products, while the Brockville plant makes Swiffer, Bounce and Downy cleaners.
Both plants produce for both Canada and the United States.
Gillette, which used to have a plant in Montreal, no longer makes products in Canada.
Its employees are spread between its Canadian head office in Mississauga and sales centres in Montreal and Edmonton.
The word on the Street
This creates 'the greatest consumer products company in the world.'
WARREN BUFFETT, whose company Berkshire Hathaway Inc. will receive 93.6 million P&G shares in the takeover. He said yesterday he plans to increase his holdings to 100 million shares.
"Both (are) absolute power houses and it's a wonderful, wonderful deal.'
MARVIN ROFFMAN, president of Roffman Miller Associates in Philadelphia, which oversees about $280-million (U.S.) in assets, including shares of P&G and Gillette.
'It's ... incrementally positive over a number of years for the two companies.'
JOHN HAYNES, fund manager at Carr Sheppards Crosthwaite Ltd. in London. His firm owns both P&G and Gillette shares.
'(It) should enjoy a steep change in growth and margin profile.'
WILLIAM SCHMITZ, an analyst with Deutsche Bank in Greenwich, Conn., who has a "buy" rating on P&G stock.
'We suspect that substantial synergies ... will quickly be found.'
ALICE LONGLEY, an analyst at Fulcram Global Partners in New York, who has "buy" recommendation on P&G shares.