Business Case

The Best Deal Gillette Could Get?P&G’s Acquisition of Gillette

Ardo Alexander

Sanjaya

Susanto

1

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 salescame from outside the U.S.

Logo produk2

2

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

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

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

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 towomen.

• 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

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

Comparison with other Acquisitions

Announcement date

Acquiror Target Transaction Value ($ in

billions)

Premiumto 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 Constellationbrands

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 0.975xexchange ratio

26/01/2005 P&G Gilllette 57.2 20.1% 20.1%

8

Transaction Multiplies

Gillette Result

Gillette MultipiesP&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

Modified All Stock Deal

P&G Rights IssueExchange 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 ShareholdersGot shares of P&G

Stock Buyback

$ 22 bio

1

2

P&G ShareholdersStocks Undiluted

P&G/Gillette ShareholdersSell some shares of P&G,

Got cash $ 22 bio

TAX

10

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

Ethics in Question

The Bankers: $ 30 mio each for confirmation of the deal where they got the money if the deal goes.

James KiltsGot $164 miofrom the deal.

Warren BuffetPast owner 10% of GilletteCurrent 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.

Solution

Would this merger actually benefit shareholders, or was it principally a wealth creation vehicle for Kilts?

Merger Announcement 27 Jan-05

$84.9223 Mar-15

13

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

Thank You

* AG Lafley, P&G CEO

15

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

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

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

$125,260,167

$ 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

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 facilitatebusiness 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.

20

• News of the deal sent Gillette’s shares soaring $5.49, or 12percent, to $51.17 in very heavy trading on the New York StockExchange, while P&G’s fell $1.50, or 2.7 percent, to $53.82 also onthe NYSE.

• On Wall Street, shares in Gillette closed up nearly 13% , whileP&G slid 2.1%.

• Involved 6,000 job cuts, 4% of the combined workforce of140,000. Company expected to reap $14 Billion in cost savings.

• Mr. Buffett owns about 33% of Berkshire Hathaway which in partowns 10% of Gillette. And at the end of the merger, he would bereceiving 93million shares of the new company.

• Regulatory Concerns: P&G’s focus on more valuable brands hasled to it shedding a number of ailing lines. It has sold off SunnyDelight, Sure deodorant and several detergents, and there isspeculation that Lafley will soon dispose of underperformingbrands from the Gillette business.

21

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

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