What's on PG's Shopping List?

November 11, 2005

With $8-10 billion in hand, Procter & Gamble is ready to make another major acquisiton (or two).

Less than a year after acquiring Clairol for $4.9 billion, Procter & Gamble is hungry for more. Now that its restructuring plan is well underway, its $4.9 billion acquisition of Clairol nearly digested and its strategy to focus on megabrands in place, company executives insist P&G is well-positioned to make an even bigger splash in personal care even as it builds on its solid base in the household segment.

"We have made substantial progress over the past two years in strengthening P&G's business," noted Alan G. Lafley, chairman, president and chief executive officer in his note to shareholders in the most recent P&G annual report. "We're back in the lead. We're committed to continuing this progress and to ensuring we squarely face changing marketplace realities-to get out in front and to stay in front of change."

Olay Total Effects Night Firming Cream is one of the latest addition to the top-selling Olay skin care line. The product made its debut in mass markets last month.

For the year ended June 30, 2002, P&G's unit volume grew 7% behind outstanding results in health care, as well as strong progress in the fabric and home care and beauty care businesses. Net sales rose 3% to just over $40 billion. Net earnings were $4.35 billion, or $3.09 per share. Results included a $706 million after-tax restructuring charge. These improvements reflect the benefits of strategic choices the company has made: sharpening the consumer value of P&G's brands, continuing to invest in innovation, leveraging marketing strengths to build leading brands in core categories and focusing on financial discipline to drive cost savings to the bottom line.

Several personal care and household product brands were credited with boosting P&G's results in 2002. Within the beauty category, Cover Girl Outlast All Day Lipcolor with PermaTone leaped to the No. 1 position in the lips segment after less than six months on the market last year, according to Jeannie Tharrington, a company spokesperson. Along with Max Factor Lipfinity, Outlast has grown the long-wear segment by nearly 70%, and the products hold two of the top three slots in this segment.

Ms. Tharrington also noted that Olay's major innovations-Total Effects and Daily Facials-continue to be successful drivers of growth beyond the launch year (2000 in the U.S.). Contributing to this growth was the launch of Total Effects Intensive Restoration Treatment in the U.S.

"At the close of the fiscal year we announced that our beauty care volume was up 32% for the June quarter, driven largely by the Clairol acquisition," noted Ms. Tharrington. But Clairol wasn't the only reason for the increase. Head & Shoulders value share for the last three months of the fiscal year increased nearly 10% in the U.S. and 20% in the UK, driven by a combination of product innovation, stronger advertising and a focus on execution fundamentals, said the P&G spokesperson. A successful global restage helped Pantene to a strong quarter in the U.S. Volume rose in the high teens and IRI value share rose 15%.

Good Gains in Home Care

Although fabric and home care is not expected to deliver the same level of growth as beauty or health care, the business still posted good results in fiscal 2002, according to Ms. Tharrington. Fabric & home care delivered strong earnings driven mostly by an excellent program of cost reduction and sharpened consumer value. Fabric care delivered broad-based volume growth across geographies and brands. "Particularly positive were the results in Western Europe, where we continue to steadily grow," she said.

Meanwhile, Dawn rose three percentage points to 33.9%, which makes Dawn a clear market leader in the U.S. with a 7.7 share advantage over the No. 2 brand in the market, according to Ms. Tharrington.

But even as some of its major brands are gaining share, P&G is cutting costs as part of the cost reduction plan first announced in 2000. First, P&G has nearly completed the re-platforming and capacity expansion in its baby care, feminine care and family care business unit that was started back in 1998. "This program has moved us to a more flexible platform on our feminine protection and diaper production lines," said Ms. Tharrington. "This will facilitate more rapid innovation at lower capital costs in the future."

The second driver in cost reduction has been manufacturing consolidation and improved capacity utilization. P&G has closed about 17% of the manufacturing modules in the company since the start of its restructuring program.

The final driver in lower capital spending has been the emphasis that's been placed on lowering capital spending on a sustainable basis to improve shareholder value. "We have strengthened the use of total shareholder return," insisted Ms. Tharrington. "This has increased the emphasis on improving capital efficiency and business decision making throughout the company."

All three moves have enabled P&G to reach its goal of reducing capital spending to 6% of sales-a goal that the company didn't expect to reach until fiscal 2004.

Will P&G finally land Beiersdorf and its top-selling Nivea brand?

Wall Street certainly applauds these results. Since the tech boom busted more than two years ago, investors have sought stable, highly visible consumer product companies that could provide some buoyancy to stock portfolios that were in danger of drowning. P&G fits the bill nicely and its stock has risen from less than $70 a year ago to nearly $90 as of Sept. 24.

The good news has continued in fiscal 2003. Early last month the company raised its guidance for fiscal first-quarter sales and earnings per share, anticipating a big increase in volume for the three-month period ending Sept. 30. On Sept. 3, P&G said that it expects to report volume growth in the double-digit percentages, based on the performance of the Clairol hair care business, acquired last year, and P&G's health care products, as well as continued strength in developing markets. Excluding the impact of acquisitions and divestitures, P&G expects volume to grow in the high single-digits.

P&G predicted first quarter sales should improve in the high single-digit percentages too, excluding the effects of foreign-currency exchanges. Core earnings per share, which exclude restructuring charges and costs associated with acquisitions and disposals, are expected to grow in the mid-teens. However, P&G said gross margin improvements will be largely offset by increased spending on marketing, research and administration.

The company expects fiscal 2003 sales, excluding foreign-exchange impacts, to grow 4% to 6%.

Based on last year's performance and this year's projections, P&G certainly seems to be weathering the global slowdown. But company executives appear determined to grab a leading position in the cosmetics and toiletries segment and the purchase of Clairol was just one part of that plan. Still, the Clairol acquisition even has analysts overseas taking notice.

Who's No. 1?
"While it does not occupy the leading position in the (cosmetics and toiletries) market, it nevertheless features among the world's top three manufacturers," noted Claire Briney, IMIS account manager, cosmetics & toiletries, Euromonitor Plc. "With the acquisition of Clairol from Bristol-Myers Squibb, P&G may have the tools to edge ahead of L'Oréal, and possibly even ahead of Unilever in the long term to become the world's leading cosmetics and toiletries manufacturer."

P&G seems determined to make that happen-but sooner, rather than later. Just last month, Mr. Lafley told the French daily La Tribune that P&G has a war chest of $8-10 billion to finance more acquisitions.

"We are certainly going to pursue our acquisitions, giving priority to beauty and health," he said. "This external growth ought to count for less than one percent of our target for global growth. Given our cash flow, we have between $8-10 billion to finance our acquisitions."

What's on P&G's Shopping List?

That announcement sparked a flurry of predictions from industry observers about the companies that may be on P&G's shopping list. Chief among them is Beiersdorf, the $4 billion German-based manufacturer of Nivea, the best-selling skin care brand in the world. In fact, on Sept. 23, shares in Beiersdorf AG jumped 20% after an article in London's Financial Times reported that P&G was about to bid for Allianz's stake in the company.

Allianz and Beiersdorf both declined to comment on the Financial Times report, but sources familiar with the situation said Munich-based insurer Allianz was still some way off deciding what to do with its 43.6% stake. Under German takeover law, P&G would have to make a public offer to all Beiersdorf shareholders, including coffee and retail group Tchibo, if it acquired Allianz's stake.

Allianz wants to sell its stake in Beiersdorf, which owns the Nivea and Elastoplast brands, as part of its strategy of disposing of substantial industrial holdings.

But talk is still just that-talk-and Tchibo, cash rich after selling tobacco company Reemtsma earlier this year to Imperial Tobacco, has stated it would like to increase its Beiersdorf holding. Tchibo sources said the company would likely make a counterbid should P&G move first.
"Then it would be up to us," a Tchibo source told Reuters.

It's not the first time that Beiersdorf has been linked to a major multinational. Several months ago, L'Oréal was also interested in the German firm. This time around, observers said it was too early to judge the accuracy of the report, although one analyst expected a deal to emerge soon.

"What is sure is that Allianz seems to be very keen on selling its stake, hence a final outcome on Beiersdorf could be seen in the coming weeks," an analyst told Reuters.

Tide is just one of 12 P&G billion dollar brands.

Beiersdorf is not the only company that might be on P&G's radar screen. One observer suggested that P&G might buy Wella, but only if it can find a buyer for Wella's weak Cosmopolitan fragrance division. The acquisition of Wella would give P&G a decent professional hair care business (Sebastian, et al) to go along with Clairol Professional. At the same time, P&G could fold Wella's retail brands, which are below critical mass, into its existing business.

Or, to boost its share in oral care, P&G might be tempted to make a bid for GlaxoSmithKline's oral care division, which includes the Aquafresh brand. Observers say the purchase would provide a boost to P&G's formidable Crest franchise, leaving GSK to digest Pharmacia and spend (even) more money on drug clinical trials, etc.

Finally, closer to home, P&G may have an interest in Dial. But analysts say the problem with that deal is that Dial is only known in the U.S. and seemingly incapable of getting a premium price. Those are all some pretty big names being bandied about. To sort it out, Happi asked leading industry consultant Colin Hession how he thought P&G might spend its money.

"Well, if I couldn't have Nivea, I'd probably take a flyer and buy U.S. hairdressing group, the Regis Corporation- poacher turned game keeper! They're the biggest owners of hairdressing salons in the world, with more than 5,000 salons in all 50 U.S. states, the UK, Canada & Puerto Rico. With Clairol in retail, that would put the cat amongst the pigeons in the hair care world!

Ohm is one of the latest extensions to Procter & Gamble's top-selling Olay line of personal care products.
"Then I'd try and save my mass male grooming business from disappearing down the tubes in the face of Unilever's Axe, by buying Edge from S.C. Johnson. I'd resist the temptation to bid for Schick from Pfizer, on the grounds that I would forever be trying to get a decent margin out of steel plate!"

Although P&G's recent and potential acquisitions are making news these days, company executives are quick to point out that many existing P&G brands dominate their respective categories. "It's important to remember that Procter & Gamble has 12 billion-dollar brands. We also have the No. 1 or No. 2 brand in 17 of the 19 key categories in which we compete, which accounts for 70% of our volume," said Ms. Tharrington.

The Crest Comeback
She noted that a new product introduction and a key acquisition have enabled Crest to recapture the lead from Colgate in the total U.S. oral care segment. That's because Crest's battery-powered SpinBrush and Crest Whitestrips have helped the brand's global sales grow 50% in the past two years. Another brand that has been a key driver is Olay. In the brand's top 10 markets globally, Olay is the No. 1 facial moisturizer in seven and the No. 1 facial cleansing brand in at least four. Furthermore, Olay has grown from the No. 2 to the No. 1 facial moisturizer brand globally.

Additionally, Old Spice has been an up-and-coming brand, according to Ms. Tharrington. "Old Spice is now the second largest male antiperspirant/deodorant on the market and growing-up from 10th when P&G acquired the brand in 1990," she told Happi. "The new Old Spice product introductions-clear gel and aerosol-have rounded out our portfolio and are growing our business."

New Products and New Places
From all of these top-selling lines, which one is most likely to become P&G's next billion-dollar brand? "While it's difficult to predict exact sales for a brand, we have stated that there are several key brands we are focusing on with billion-dollar potential," noted Ms. Tharrington. "Olay is pushing to join the billion-dollar-brand club with shares growing in key Olay markets-the U.S., Canada, UK, China and Australia-all this despite broad competitive responses to our Daily Facials and Total Effects initiatives."

Right now, five of P&G's 12 billion dollar brands are household or personal products, including Tide, Ariel, Pantene, Crest and Downy/Lenor (To see what other brands are members of the billion-dollar club, see the chart at left).

P&G may be emphasizing brands in its quest for growth, but the company has also targeted several countries and regions where it expects sales to outpace the rest of the world. Specifically, P&G is bullish on China, Turkey, Mexico, the countries of Central and Eastern Europe and the countries of Southeast Asia, according to Ms. Tharrington.

New products that are expected to give a lift to fiscal 2003 sales include Olay Total Effects Night Firming Cream, which debuted just two months ago. According to P&G, it contains the highest concentration of Olay skin-strengthening VitaNiacin combined with hydrolyzed wheat protein and hydrators. This formula strengthens skin's structure through an improved moisture barrier and intensely moisturizes to provide visibly firmer, more supple skin.

Two new Crest products are being launched now, and company executives expect them to add to the brand's growth. Crest SpinBrush Pro features improved bristle motion for a professionally clean feeling. Crest Rejuvenating Effects is the first toothpaste specifically designed with a woman's needs in mind. The new beauty toothpaste helps keep women's smiles looking and feeling younger longer.

A combination of new product introductions, key acquisitions and growing sales in emerging markets should all help boost P&G's sales well beyond fiscal 2003.
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