Upload
alo-sin
View
224
Download
0
Embed Size (px)
Citation preview
8/12/2019 Gillette Valuation Report
1/34
Project for Business Analysis and Valuation using Financial Statements
Gillette Valuation Report
Proter and Gamble Acquires Gillette Case
Group Members:
Junyong Zheng
Adele Valentin
Daniel Diesinger
Jonathan Karp
Harald Getrey
8/12/2019 Gillette Valuation Report
2/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
Content
Part 1 History and Background..............................................................................................1
1.1 History of Procter&Gamble.................................................................................1
1.2 History of Gillette ...............................................................................................21.3 Continuing of both companies .............................................................................2
Part 2 Strategy Analysis.........................................................................................................3
2.1 Gillette and P&Gs Main Areas ...........................................................................3
2.2 Synergy effect and Risk Analysis ........................................................................4
2.3 Conclusion..........................................................................................................6
Part 3 Financial Ratios Analysis ............................................................................................7
3.1 Sales ...................................................................................................................7
3.2 Profitability .........................................................................................................7
3.3 Capital Management ...........................................................................................8
3.4 Leverage Analysis...............................................................................................9
3.5 Conclusion........................................................................................................10
Part4 Assumptions analysis .................................................................................................11
4.1 Salesgrowth and EBITDA margin ...................................................................11
4.2 Tax rate.............................................................................................................15
4.3 Operating working capital to the sales ...............................................................15
4.4 Net long term assets to the sales ........................................................................16
4.5 Net debt to capital .............................................................................................17
4.6 Depreciation & amortization to sales .................................................................17
4.7 Capital expenditures to sales..............................................................................174.8 Conclusion........................................................................................................18
Part 5 Valuation...................................................................................................................19
5.1 FCFF Valuation Methods ..................................................................................19
5.2 Discount rate.....................................................................................................19
5.3 Valuation as an independent firm ......................................................................21
5.4 Valuation of target after acquisition...................................................................23
5.5 Value of merger benefits ...................................................................................26
5.6 Conclusion........................................................................................................26
Appendix:............................................................................................................................27
8/12/2019 Gillette Valuation Report
3/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
1
Part 1 History and Background
1.1 History of Procter&GambleIn the year 1837, William Procter and James Gamble create a new company: Procter&Gamble.
In this year Procter&Gamble starts to sell only soap and candles. This are first objects which P&C
sells.
After 22 years, P&C employs 80 employees and made a turnover of $ 1 million.
In the year 1890 P&C is selling more than 30 different types of soap and William A. Procter
assumes the leadership of the enterprise.
1907, the son of William A. Procter, William Cooper Procter became the new chief of thecompany because his father died.
1930, William C. Procter gives the business into another hand.
Richard R. Deupree will be, now, the new chairman of P&C.
In the year 1931, Neil McElroy, the Companys Promotion Department Manager, gives out a new
marketing strategy. This strategy should specialize every brand in a different way.
The brand management of P&C was born.
In the years from 1934 until 1937, the last member of the origin family, William C. Procter died.The company reinforce his engagement in the Far East with an acquisition of the Philippine
Manufacturing Company.
1937, the company celebrates his 100thbirthday and the sales reached about $ 230 million.
Neil H. McElroy will be the next leader of P&C in the 1948.
In the Sixties, the company make some more big acquisition to continue the growth of the
company. 1957, Howard J. Morgens is the successor of Mr. McElroy.
The Seventies are the years of the big expansion. The company creates sub-companies for
example in Germany, Belgium, the Middle East, Japan and other big companies.
1974, Ed Harness will be the next chief-executive-officer of P&C.
The Eighties are also exciting. The company reached a turnover of $10 billion, another CEO will
get the reins for the company and the company makes new acquisitions, for example:
The acquisition of Norwich Eaton Pharmaceutics.
1990, again a new chief for the company: Edwin L. Artzt became the new boss of P&C.
8/12/2019 Gillette Valuation Report
4/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
2
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.
John E. Pepper will be the ninth chairman of the company and Durk. I. Jager became the first
Chief Operating Officer in the year 1995.
In 1999 Jager will be the next chairman of the company.
In the Millennium P&C gets again a new chairman, A.G. Lafley is the next President and Chief
Executive.
2002, P&C celebrates the 165thanniversary of the company.
P&C has $ 12 billion brands in its portfolio, this is representing more of the half of the company
sales.
1.2 History of GilletteIn the year 1901 the Gillette Company is founded 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. After the year 1907 Gillette Blades will be to have in Germany.
In the year 1967 the BROWN GmbH, an important manufacturer of drying electric shavers and
electrical small devices, will be part of the Gillette Company.
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.
1998 is a great year for Gillette. Gillette has created a new shaving system: the Gillette MACH3-
Shaving-System.
2001, Gillette has got its 100.Birthday. The Company exists now 100 years and has made in this
100 years a huge success.
In the year 2004/2005 there are some phrases about a big merger with another big company.
1.3 Continuing of both companies
01.02.2005 Procter and Gamble is nearing a deal to purchase Gillette in a stock swap value at
about $ 55 billion.
Under the terms of deal, P&G is offering 0,975 P&G share for each share of Gillette outstanding.
That would value Gillette shares at $ 53,94 based on P&Gs Thusrday closing price of $ 55,32, the
Journal said. The offer represents a 17,6% premium to Gillettes closing price of $ 45,85.
8/12/2019 Gillette Valuation Report
5/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
3
Part 2 Strategy Analysis
2.1 Gillette and P&Gs Main AreasP&G works in 5 main areas: House, Personal Beauty, Baby, Health & Wellness and Pet
Gillette works in 2 Gillettes traditional sectors: Personal beauty with the Gillette Range and
Health & Wellness with the Oral B Toothbrushes brand.
Gillette is also working in the batteries sector with the Duracel brand.
Gillette and P&Gs main areas
Procter & Gamble works in 5 traditional sectors:
Personal
BeautyHouse
Health &
WellnessBaby Pet
The 3 gilettes sectors will be considerate as 2 P&Gs sub-sectors "
Razors, blades,
personal products
Oral Care:
Toothbrushes,"
"and one new sector:
Batteries
Gillette brand Oral B brand
Duracel brand
2 from the top 100
world brand
8/12/2019 Gillette Valuation Report
6/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
4
Will many references be suppressed ?
All Gillettes brands are strong brands which will ad value to the
P&G!s portfolio
We can suppose that most of Gillette's references will be conserved
Gillette products portfolioGillette products portfolio
2 of the 5 P&G sectors will be impacted:
Personal Beauty: P&G and Gillette have exactly the same products intothe Mens deodorants segment. The Gillette notoriety is so high on this
segment that P&G may suppress 1/3 of its Men deodorants activity
Health & Wellness: P&G and Gillette sell exactly the same products for
Childs on the Tooth Brushes and the Toothpaste market. Each One pay
big licenses (Spiderman & Disney) for a product. They can do big
economies with the suppression of one of it
P&G products portfolioP&G products portfolio
Few brand suppressed but 2 P&Gs sectors enlarged will enable
economy of scale
2.2 Synergy effect and Risk Analysis
Thanks this analysis we can assume that Synergies will be realized though:
Similar Brands Cutting in the Child toothpaste and in the Mens deodorant sector.
Suppression of Similar jobs in the company
The worldwide brand Gillettes knowledge
So we can assume that synergies anticipated by the P&Gs analyst are good.
8/12/2019 Gillette Valuation Report
7/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
5
A Great opportunity for both companies
The new shareholder will enable Gillette to develop their brands withmore resources
They will have benefits from the P&G marketing strcuture
An opportunity for GilletteAn opportunity for Gillette
The most important benefits for the P&G group are
More Bargain power: The biggest group of its sector: No one can deal w ithout them
2 news for the top 100 brands: Gillette & Duracell: Retailers can not a fford
them not to sell its
A higher share in 2 department and a new department: the batteries
Economy of scales: Job cuttings into central functions, some expensive
segments and products will be suppressed, R&D, marketing andcommunications expenses will be reduced
An opportunity for P&GAn opportunity for P&G
Bargain Power and Economy of Scale are the most important factors about a merger in the goods
industry.
We can say that there is a good completion between both companies and there differences can lead
to a new strength.
8/12/2019 Gillette Valuation Report
8/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
6
A risk for P&G: the Gillette's integration
Global Marketing
approach: 1
product for the world
market
1 team working for
the world market
Gilette structureGilette structure
Diversity and
regional approach:
quite the same
product declined in
10 brands
Patchwork of team
for each region
P&G StructureP&G Structure
++ P&G can realize
economies of scales
thanks the gillette
"world brand#
knowledge but they
must not impose
theirs own methods
to gilette structure
ImpactImpact
Innovation culture,
how to be the most
competitive though
technologies
Social
responsibility
approach
+ P&G can have
benefits from the
Gillette R&D
structure and use its
technologies in some
project
P&G can have benefits if they adopt an hybrid structure (keeping the
Gillette's structure and use it for big world projects) but this changes has a
cost, and they will have to do integration effort
2.3 Conclusion
As a conclusion, we can assume that :
1. This merger seems to be very positives:
l Some Synergiesare possible
l Many Economy of Scalewill be realized
l The bargain powerof the group will be much important
l P&G will learn from the Gillettes Technology knowledgeand R&D efforts
l And P&G will invest in some new Gillette's high value projects
2. But Many effort have to be done to do this merger a success:
l They have to create a new organization which not destroy the Gillettes structure
l They have to integrate the gillettes methods to lauch new !world product
l They have to invest a lot to manage the change and have only one business culture
8/12/2019 Gillette Valuation Report
9/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
7
Part 3 Financial Ratios Analysis
3.1 SalesSales growth is not exactly a financial ratio as it has no immediate link to the balance sheethowever it is quite a useful way, at least to start with, of looking at how the company has
performed.
-5,00%
0,00%
5,00%
10,00%
15,00%
20,00%
2001 2002 2003 2004
Gillette
P&G
3.2 ProfitabilityProfitability is the core measure for a firm in order to determine its past and future performance.
So in this first section I will try to determine how well both companies have performed in terms of
profitabiltity.
First I let us consider the ROE. Gillette has had in the four year period averaged an ROE 54,5%.
Compared to the average of American firms (that stands at 12%), this is at first sight a very
impressive figure.
Initially that means that they have compared to other companies rewarded their shareholders with
more profits that other companies, and that revenues have been much higher.
However how did Gillette arrive at this number? They might have used a leverage effect and put
lots of debt in the company so that ceteris paribus the ratio would have increased or they might
have used some accounting cosmetics that would have increased profits.
Compared to other companies Gillette has actually had quite a high leverage of about on average
3.6 debt/equity. This becomes especially significant as P&G which has a significantly lower
leverage also has got a lower ROE. On average Gilette has had 1,5 times the debt to equity ratio
than P&G.
8/12/2019 Gillette Valuation Report
10/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
8
Also the share of equity in the balance sheet (or the proportion of total assets) has been 1,5 times
higher for P&G.
Taking account of this P&G has averaged an ROE of about 47% over this period. Compared to the
average this is quite an impressive number.
As ROE is pretty similar next thing to look at is operating profit margin. It takes only into account
the profit that has been generated from operations that means there is no influence of non $
operating factors.
Here Gillette has had an average operating profit margin of 21,3% whereas P&G was 16,5%.
A very important strategic issue for both companies is advertising expenses. As they both produce
consumer goods not industrial goods this will naturally be a high percentage of sales.
Examining this figure more closely is important as it shows on average how much $ of advertising
was necessary to generate 1$ of sales.
Here the both companies have roughly the same percentage, P&G at 9,6% and Gillette at 8,7%.
Concluding it can be said that Gillette has been slightly more profitable over the examined period.
3.3 Capital ManagementHere we will look at first at accounts receivable turnover. This ratio indicates how much money
one receivable is worth on average. The higher this ratio, the shorter the money collecting period.
This has also a significant impact on the cash flow.
There is a significant difference between the two. Gillette stands at 8,8, P&G at 13,3, so P&G is
more efficient.
However as the below diagram shows Gillette has become more efficient doing this.
Receivables turnover
-
2,00
4,00
6,00
8,00
10,00
12,00
14,00
2001 2002 2003 2004
Reihe1
The next ratio to look at is inventory turnover. This is an indication how often company turns over
its inventory.
8/12/2019 Gillette Valuation Report
11/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
9
P&G has a value of 6,3 whereas Gillette only achieves 3,5.
Again P&G is more efficient.
The next area to look at is the long term performance of capital. The net long term asset turnover.
This measure evaluates how good a company manages its long term assets. The higher the ratiothe more efficient the use of it.
For P&G the ratio stands at 1,5 for Gillette at 1,7 suggesting no big differences between the 2
companies.
3.4 Leverage AnalysisLeverage Analysis takes account mostly of how well a company has been able to meet its
obligations, and how it could finance them if it would have to.
For the short run the obvious measure to look at are the current ratio as well as the quick ratio.
Here I will use the quick ratio as it is a more!strict
"approach of measuring a companies short
term ability of paying back debt. For example it doesnt include deferred income tax as this is a
really unsafe asset, often influenced by optimizing the firms tax payments.
Gilette has an ratio of 57% whereas P&G has 50%. This is somewhat surprising given the fact that
Gillette overall has got a much higher debt/equity ratio.
This might be a stragegic issue as Gillette wants to increase their leverage by taking on a lot of
long term debt whereas they want to be !save"paying off their short term liabilities.
The second part of debt is to look at the long term debt. As stated earlier Gillette has had on
average 1,5 more debt as P&G, which is mainly composed of long term debt.
The next ratio to look at is the ability of the company to cover interest payments out of the cash
flow (interest coverage ratio).Gillette%s average stands at 49 whereas P&G stands at 17.
This number is suggesting that Gillette is having a very strong cash flow, given its higher
leverage.
8/12/2019 Gillette Valuation Report
12/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
10
Interest coverage
0,00
10,00
20,00
30,00
40,00
50,00
60,00
70,00
80,00
90,00
2001 2002 2003 2004
Gillette
P&G
3.5 ConclusionFrom these simple numbers the following can be derived:
l Gillette has a high leverage, leading to a high Return on Equity i.e. Gillette is a profitable
company, more that P&G
lGillette has a strong cash flow i.e. sound financial fundamentals
All these factors could explain a high possible net present value.
8/12/2019 Gillette Valuation Report
13/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
11
Part4 Assumptions analysisAfter strategic analysis has allowed us to understand the underlying objectives for P&Gs
acquisition of Gillette; while financial analysis has helped identifying both companies strenghths
and weaknesses, conclusions must be drawn out of this to assess the benefits for P&G of merging
with Gillette. It has two aspects, and it involves the valuation of the firm in different ways.
The first step is to assess the value of Gillette as an independent firm. Indeed, this is the starting
point for analysing what it represents as potential value for an acquiring firm. The second step is to
include in this analysis the expected benefits of the merger. This will eventually lead us to
comment on the 18% premium offered by P&G for Gillette, which is 28 times projected 2005
earnings.
The value of Gillette as an independant firm can be derived from the free cash flow valuation
method, using a set of assumptions about Gillettes future.
These assumptions depend on the previous learnings about the firm accounting practices, about its
strategic choices and from the ratio analysis.
Some key drivers are needed for the forecast of Gillettes future cash flows, being:
l Salesgrowth
l EBITDA margin
l Interest rate on beginning debt
l Tax rate
l Operating working capital to the sales
l Operating long term assets to the sales
l Debt to capital
4.1 Salesgrowth and EBITDA marginWhat must be taken in account is that salesgrowth is usually !mean reverting", which means that
a very high path of growth (that is, way above the average) will eventually return to a more normal
level in the long run. However, situations may allow companies to keep a high growth rate when
they have a sustainable competitive advantage, which is Gillettes situation.
1. Business segments
Let us examine separately Gillettes business segments and projected evolution of sales.
Impact of exchange not taken in account
(1) Blades and razors
This segment represents Gillettes core business. It holds 70% of market shares. This position is
supported by regular launching of high-technology new products and high advertising.
In 2004, thanks to the launching of new products such as razor M3 Power, sales grew 12%,especially in the domestic market and in the UK. Growth in 2003 was 13%.
8/12/2019 Gillette Valuation Report
14/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
12
This is also a highly profitable segment, thanks to premium-priced products and incentives for
consumer trade-up to premium brands. In 2004, operating profit was 37.6%, with an increase of
14% from 36,8% in 2003.
This trend is consistent with Gillettes strategy to keep its position on this segment withtechnology leadership and advertising.
As for sales, even though the main part of sales are located in mature markets, we can
expect them to keep on growing at this rate because of the new products and geographical
expansion in developing markets. Moreover, the 40% increase in total advertising
expenses in 2004, primarily focused on this segment, will only have its full effect one
year later. Therefore we can expect sales growth to be 14% in 2005, and 12% the
following years.
As for the operating profit, tow main factors account for its probable evolution. First, the
advertising efforts aim at increasing consumer trade-up to premium products with higher
margins. Second, Gillette set up in 2003 the Manufacturing Realignment Program aimed
at reducing costs, improving operating efficiency and streamlining manufacturing,
packaging and warehouse operations for the European blades and razors manufacturing
and distribution. Once completed, starting from 2006 it should lead to annual cost savings
of 50-60 million. In this context we can expect operating margin to remain at a high level
and the operating profit to keep the path with the growth of sales. We thus assume an
operating profit up to 40% for 2005 and thereafter.
(2) Duracell
In 2004, sales in the segment of battery grew 11% thanks to strong demand, as opposed to 6% in
2003. However, there is a strong competition of low-priced and low-performance batteries, and
Duracell kept its market share thanks to lowered prices after the price-realignment program in
North America and to the double-digit advertising expenses.
The industry of battery gives Gillette a good margin thanks to its big efforts for manufacturing
efficiencies in 2004. It grew 41%, from 17.2% to 22% of sales.
Different facts have to be taken in account for the forecast.
The sales are primarily located in the US and in Europe, which are mature markets. The
objective for Gillette is to keep its market share in those regions, while it keeps its
industry margin. But there is strong competition, and demand in 2004 was influenced by
unusually active hurricane season in the US. Yet, in 2003, Gillette acquired a majority
interest in the Fujian Nanping Nanfu Battery Company in China. Sales are thus expected
to grow in such a developing market. Indeed, it only contributed about 2% of the sales
growth in 2004. This part should increase. This should compensate the probable decrease
in growth rate in domestic market. Moreover, advertising efforts should also foster sales.
We can therefore expect a reasonable 9% in 2005 and 10% after.
As for operating margin, the continuing efforts of Gillette in Cost saving programs, with
the Companys Strategic Sourcing Initiative and the Functional Excellence Program set in
2002, should t least allow for a stable operating margin, consistent with the strategy of the
8/12/2019 Gillette Valuation Report
15/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
13
firm, in spite of the probability that the firm will have to keep on lowering prices. We can
thus forecast a 22% of sales operating margin for 2005 and after.
Oral careThe segment of Oral Care was driven in 2004 by growth of global share and strong sales growth
of 20%, compared to 6% in 2003. This outstanding growth, which is the highest in all segments, is
due to the strengthening of Oral-B as the number one product in global brushing market, to the
launching of new products such as Professional Care 8000 and Sonic Complete rechargeable
brushes, and to relevant investments, with the acquisition of Rembrandt teeth-whitening products
to complete Gillettes product line. The advertising supported the introduction of the new
products.
In this segment the operating profit grew 14%, however the operating margin decreased from
16.4% in 2003 to 15.7% in 2004, which means the segment is less profitable.
For the forecast we should keep in mind that Gillettes strategy in this segment is to extend its
global share through investments and innovation.
Concerning sales, there is a high competition in the segment and especially from battery-
powered products. Therefore, Gillette plans to increase its market share with the
introduction of new products and with consumer trade-up from manual to power products.
In parallel, Gillette also pursues its geographic expansion.
As Gillette is having an offensive strategy on this market and has launched a number of
new products supported by advertising we can expect a 25% growth in 2005 and after.
In terms of operating profit, this segment can be seen as cost-consuming, because of the
important innovation and advertising efforts Gillette makes for growing its market share.
Therefore, although new products have higher prices, it will be difficult for the company
to keep the path with salesgrowth and we can expect the operating profits growth to be
lower than the salesgrowth. Thus we can assume the operating margin to decrease to
14.5% in 2005 and after.
(3) Braun
In this segment, Gillette has diversified a lot and holds a full product line. Thanks to the
introduction of new products and geographic expansion, sales grew 16% in 2004, compared with
11% in 2003. However, Gillette has decided to refocus on its core business with dry shaving
systems.
This segment is highly capital intensive and operating margins are low. However, due to product
rationalization, product sources changes and manufacturing efficiencies, operating profit for this
segment went 94%, from a 4.1% margin to a 7% margin in 2004.
Braun operates on quite mature markets. The companys objective on this segment is to keep
margins higher than the cost of capital. Therefore we can expect the company to continue its effort
of refocusing on core products and of launching attractive new products.
8/12/2019 Gillette Valuation Report
16/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
14
Sales can therefore be expected to decrease for certain products and increase for others.
The companys strategy on this segment is not very offensive and focuses more on
improving operating profit. We can assume the growth rate to stay at a 15% level.
Operating profit should keep on growing as efforts are made to suppress non profitable
products and for cost savings. We can assume the operating margin to increase 50% morethanks to the remaining effects of rationalization, and to refocusing on products with
higher margins, up to a 10,5% margin for 2005, which should remain stable thereafter,
taking in account the specific capital-consuming level of this segment.
(4) Personal care
The last segment, the personal care products, was driven in 2004 by the high sales growth on
outside markets, in Europe, Africa, Middle East and Eastern Europe, making an 11% increase in
sales compared to 6% in 2003. In 2004, Gillette has reinforced its global share in shaving
preparations in key markets.
While the segment only accounts for a small part of the total operating profit of Gillette, operating
profit grew 30% in 2004, from a 8.4% margin up to a 9.9% margin thanks to manufacturing
savings and overhead cost lowering.
This evolution is consistent with the firms objective, which is to achieve modest growth and
increase margins.
l The sales can be expected to continue growing at the same rate because of geographic
expansion and introduction of new products, without any major action planned for this
segment. We can therefore assume a 11% salesgrowth for 2005 and after.
l Efforts in cost savings can further increase operating profit, however at a lower rate. We
can assume this growth in operating profit will maintain a 10% profit margin.
2. Synthesis
Assumptions about salesgrowth
% of net
sales 2004
Sales' growth
in 2005
Pondered
sales' growth
2005
% of
projected
sales 2005
Sales' growth
after 2005
Pondered
sales' growth
after 2005
Blades & Razors 41,32% 14,00% 5,78% 41,15% 12,00% 4,94%
Duracell 21,30% 9,00% 1,92% 20,29% 10,00% 2,03%Oral Care 15,17% 25,00% 3,79% 16,56% 25,00% 4,14%
Braun 13,04% 15,00% 1,96% 13,10% 15,00% 1,96%
Personal Care 9,17% 11,00% 1,01% 8,90% 11,00% 0,98%
Total 100,00% 14,46% 100,00% 14,05%
8/12/2019 Gillette Valuation Report
17/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
15
Assumptions about EBITDA margin
% of PFO
2004
Profit margin
in 2005
Pondered
profit margin
2005
% of
projected
PFO 2005
Profit margin
after 2005
Pondered
profit margin
after 2005
Blades & Razors 63,68% 40,00% 25,47% 64,32% 40,00% 25,73%
Duracell 19,16% 22,00% 4,21% 17,44% 22,00% 3,84%
Oral Care 9,73% 14,50% 1,41% 9,38% 14,50% 1,36%
Braun 3,71% 10,50% 0,39% 5,37% 10,50% 0,56%
Personal Care 3,71% 10,00% 0,37% 3,48% 10,00% 0,35%
Total 100,00% 31,86% 100,00% 31,84%
4.2 Tax rateThe effective tax rate has been decreasing 1% every year: 32.2% in 2001, 31% in 2002, 30% in
2003 and 29% in 2004, due to the possibility of making a favourable mix of earnings to countries
taxed at rates lower than the US statutory rate.
Table 6.3 Reconciliation of the statutory Federal income tax rate to Gillettes effective tax rate
Source: Gillette Annual Report 2003
Form the above Table, we can see the effective tax rate of Gillette in 2003 is 30%. So we forecast
its stable and keep 30% in the following years.
4.3 Operating working capital to the salesGillette has been pursuing a policy of improvement of its working capital management. Operating
Working Capital related to the sales decreased from 16% in 2001 to 8% in 2002, and 2% in 2003
and operating working capital turnover grew from 12 million in 2002 to 54 million in 2003.
This is primarily due to a better management of Accounts receivable, which decreased 8% in 2003.
This trend was even stronger in 2004 with a 23% decrease in Accounts receivable, and combined
with a higher average day sales in the last quarter, let Day Sales Outstanding go down 32 to 24
days in 2004.
8/12/2019 Gillette Valuation Report
18/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
16
Working capital management
2004 2003 2002 2001
Operating working capital1 NA 170 708 1333
Operating Working Capital/Sales NA 2% 8% 16%
Day Sales Outstanding2 24 32 43 55
Days Inventory On Hand3 110 108 97 108
Days Payable Outstanding4 NA 57 60 43
Operating working capital turnover5 NA 54,42 11,94 6,06
Accounts receivable turnover6 12,55 10,06 7,03 5,49
Inventory turnover7 3,30 3,39 3,78 3,37
Assessing the evolution of this trend needs to take in account different factors:
First of all, management of working capital should further improve because of the companys
statement to follow this strategy and due to the effects of the programs (Functional Excellence
program and Realignment program) aimed at optimizing inventory and supply chain management.
Another factor to take in account is the product mix, that influences DSO. It is traditionally lower
for blade and razors, manual oral care and personal care, and higher for Duracell, Braun and
power oral care. As pondered sales growth shows, sales in the segment of blades and razors
should be the highest, then product mix should support this trend. Although we dont know the
evolution of 2004, we can assume the operating working capital to go down 1%.
4.4 Net long term assets to the salesLong term assets management
2004 2003 2002 2001
Net long term assets8 na 5614 4968 4979
Net long term assets/Sales na 60,68% 58,77% 61,59%
Net long term assets turnover9 na 1,65 1,70 1,62
Capital expenditures 616,00 408,00 405,00 624,00
Capital expenditures % net sales 6% 4% 5% 8%
Since 2001, Gillette has had a quite stable fixed assets management, with a net long-term assets
turnover ranging around 160% to 170%.
1(Current assets-cash and marketable securities) - (current liabilities-loans payable and current portion of long-term debt)2Receivables/Average daily sales (3 last months sales/90)3Inventory/(Cost of sales/365)4Accounts payable/Cost of sales/3655Sales/OWC6Sales/Accounts receivable7
Cost of goods sold/Inventory8Sales/ net long-term assets
8/12/2019 Gillette Valuation Report
19/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
17
We know from the firms statement in the annual report 2003 that the company expects over
the long term capital spending will average 7% of net sales. We can expect this growth of capital
expenditures to be aimed at maintaining the favourable long term asset turnover, and we assume
net long term assets to the sales will remain average 60% of sales.
4.5 Net debt to capital
Embedment
2004 2003 2002 2001
Long term debt 3195 2984 2984 2082
Net debt/equity ratio na 1,60 1,67 1,95
The company has had a net debt/equity ratio revealing a very healthy financial structure.
We can assume the level of net debt to capital to remain stable, around 1,60.
4.6 Depreciation & amortization to sales
Depreciation & amortization to sales percentage
2003 2002 2001 2000 1999 Average
Depreciation & Amortization 578 500 509 535 464
D&A/Sales 6.25% 5.92% 6.30% 6.44% 5.11% 6.00%
We can assume the level of Depreciation & amortization to sales percentage, around 6%.
4.7 Capital expenditures to sales
Capital expenditures to sales percentage
2004 2003 2002 2001 2000 1999 Average
Capital expenditures 616 408 405 624 793 889
Capital expenditures/Sales 5.88% 4.41% 4.79% 7.72% 9.54% 9.80% 7.02%
We can assume the level of Capital expenditures to sales percentage, around 7.02%.
9Sales/ net long-term assets
8/12/2019 Gillette Valuation Report
20/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
18
4.8 ConclusionThe following assumptions can thus be used to calculate Gillettes value as an independent firm:
Assumptions for the valuation
2005 After 2005
Sales' growth rate 14,86% 14,05%
EBITDA margin 31,86% 31,84%
Tax rate 30% 30%
Operating working capital/sales 1% 1%
Net long term assets/sales 60% 60%
Net debt/equity 1,6 1,6
8/12/2019 Gillette Valuation Report
21/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
19
Part 5 Valuation
5.1 FCFF Valuation MethodsTo value Gillette, we will use the Free Cash Flow Approach.
The free cash flow to the firm (FCFF) is the sum of the cash flows to all claim holders in the firm,
including stockholders, bondholders, and preferred stockholders.
A simple way of getting to free cash flow to the firm is to estimate the cash flows prior to any of
any of the above claims. Thus we could begin with the earnings before interest and taxes, net out
taxes (then we get NOPAT, net operating profit after-tax) and reinvestment needs, and arrive at an
estimate of the free cash flow to the firm:FCFF = NOPAT + depreciation&amortization $changes in NWC $Capex
Comparing to other valuation method, FCF has the following advantages:
l Capture the firms future growth system instead of final result logically;
l Suited for growth firm with low or zero dividend payout ratio;
l Absorb important assumption which include sales zgrowth rate, EBIT/sale ratio, tax rate,
depreciation&amortization portion, working capital percentage to sales, discount factor, etc.
So, we will use the FCFF model to value Gillette.
5.2 Discount rateThe discount rate to be used for Gillettes valuation would be the companys weighted average
cost of capital. To get the WACC of Gillette we need to figure out by the following steps:
(1) cost of debt
The Companys investment grade long-term credit ratings of AAfrom Standard & Poors and
Aa3 from Moodys and commercial paper ratings of A+ from Standard&Poors and A1 from
Moodys. So we can simply find out the spread on newly issued AA- rated bonds is. And adding
the benchmark yield, we can get the cost of debt for Gillette. For the spread, we can find it from
table 6.2. For the debt structure of Gillette, the weighting average of the debt term to maturity is
almost 5 year. So we choose the 5 year treasuries note yield as the benchmark and the 5 year
spread to get the cost of debt. The average weekly yield for 5 year t-note yield is 3.735% from
Table 6.2. So we can get the cost of debt for Gillette is 3.735%+0.46%= 4.295%.
8/12/2019 Gillette Valuation Report
22/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
20
Table 5.1 Spread for bond with given ratings
Rating 1 year 2 year 3 year 5 year 7 year 10 year 30 year
Aa3/AA- 20 34 35 46 59 69 97
A1/A+ 39 43 47 53 67 81 105
Source: bondsonline.com
Table 5.2 Weekly 5 year T-note yield in 2005
Week Close date Yield (%)
1 2005-01-07 3.71
2 2005-01-14 3.72
3 2005-01-21 3.7
4 2005-01-28 3.71
5 2005-02-04 3.726 2005-02-11 3.66
7 2005-02-18 3.77
8 2005-02-25 3.89
Average weekly yield 3.735
Source: finance.yahoo.com
(2) Tax rate
Table 5.3 Reconciliation of the statutory Federal income tax rate to Gillettes effective tax rate
Source: Gillette Annual Report 2003
Form the above Table, we can see the effective tax rate of Gillette in 2003 is 30%. So we forecast
its stable and keep 30% in the following years.
(3) cost of equity
We can get the cost of equity form CAPM model.
Since Gillette lists in NASDAQ, we calculate the NASDAQ index average yearly return from
1985 to 2004 as the market return and we get 16.53%. As for the current risk-free rate, 3m
8/12/2019 Gillette Valuation Report
23/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
21
Treasuries bill yield is trading at 2.70% per year. For the beta, we get 0.700 from
finance.yahoo.com. So the cost of equity of Gillette is :
Cost of equity = 2.70+0.772!(16.53-2.70) =12.38%
(4) WACC
At the end of year 2004, we get the following information from Gillettes Earning Report in Feb 3,
2005: In Dec 31, 2004, Total debt is $3,386 million, the StockholdersEquity is $2,836 million.
So the WACC is calculated as:
%28.7386,3836,2
386,3%)301(%295.4
386,3836,2
836,2%38.12 =
+
+
+
5.3 Valuation as an independent firmFrom the assumption part we get the following forecast:
Table 5.4 assumptions for the valuation
2005 After 2005
Sales' growth rate 14,86% 10,00%
EBIT margin 31,86% 31,84%
Tax rate 30% 30%
Depreciation and amortization to Sales
percentage6.00% 6.00%
Net working capital to sales percentage 1% 1%Capital expenditures to sales percentage 7.02% 7.02%
Discount rate 7.73% 7.73%
Before the valuation, we need to figure out the Terminal Value.
The terminal value in this model is critical, because it must capture all free cash flow value
flowing indefinitely into the future. Although the cash flows are estimated for the explicit period
of 2005 to 2011, Gillettes business will most likely continue far into the future. The typical
calculation of the terminal value uses a constant dividend growth model. Assuming a discount rate
of 7.73% (the WACC) and a free cash flow growth rate into the future of 1.0% per year
(conservative estimation) terminal value in year 11 of the analysis as:
7.53832)1(
ValueTerminal 2011 =
+=
gk
gFCFF
wacc
Then we can input the above input to the Excel Spreadsheet created by us. We can get the Value
of Gillette as an independent firm. See Table 6.6
From the result, we see that the equity of Gillette is valued at $51.275 billion or $48.09 per shareas an independent firm.
8/12/2019 Gillette Valuation Report
24/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
22
Table 5.5
8/12/2019 Gillette Valuation Report
25/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
23
5.4 Valuation of target after acquisitionFor Procter & Gamble, after the acquisition, they can create synergy effect. So we need to take
such synergy effect into account.
In a consumer analyst meeting, in describing the many strengths Gillette brings to the combination
with PROCTER & GAMBLE, Mr. Kilts, Gillette Company Chairman, President, CEO, said,
"Strength plus strength will equal success as a very strong Gillette combines with an equally
strong Procter & Gamble. We will create a global company built upon scale, diversity and brand
strength - all requisites for consistent growth in a consolidating, highly competitive global
environment. This is an opportunity to help build something that Gillette has been pursuing for
four years ... to become the best consumer products company in the world."
Mr. Kilts discussed the businesses and capabilities Gillette has created, which will continue to
deliver, strong consistent growth. He described four key growth drivers that give the Company a
unique competitive advantage: Gillette's presence in high-growth, advantaged global categories;
its technological leadership in these categories; its ability to drive consumer trade-up around the
world to better- performing, premium products; and the Company's culture, which is defined by a
constant turnaround mentality and a drive for total innovation.
The synergy effect as the following:
l Cost cut and EBIT margin:
Cost can be reduced in the aspects of Administrative overlap, advertisement expense, R&D,
employment cost, promotion expenditure. And we estimate the above 4 aspects decrease as
following:
Table 5.6 Selected cost item of Gillette
Item 2003 2002 2001 2000 1999
Advertising costs 827 647 576 539 513
Advertising costs to Sales 8.9 7.7 7.1 na na
Sales promotion 376 319 319 na na
Sales promotion to sales 4.1 3.8 3.9 na na
Other Selling, General and
Administrative Expenses2,338 2,206 2,112 na na
Other SG&A 25.3 26.1 26.1 na na
Cost of Sales 3,708 3,511 3,407 3,469 3,486
R&D expenditures 202 185 187 179 201
Source: Gillette annual report 2001,2002, 2003
From table 5.6, we see the advertising costs, sales promotion expense and other SG&A expense
are increasing sharply. And after the acquisition, since the new company can manage the
8/12/2019 Gillette Valuation Report
26/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
24
advertising and marketing plan together and surely lower the cost for Gillette. For the sale
promotion, because PROCTER & GAMBLE have created a very good organic structural and the
new company with over $60bn revenue can increase the bargaining power to the retailer, such as
Wal-Mart Stores, Inc. And we estimate 15% cost cut from the advertising expenditures and 20%
cost cut from the sales promotion expense. So the advertising and sale promotion save should be
827!15%+2338!20%=591.65. From the labour, Gillette can lay off some employees especially
some managers for administrative lay lap to cut the cost. And we estimate conservatively this cost
cut will be 15%. And we reset the EBIT margin assumption 1 percentage up to 22.05% to reflect
the employment cost save.
l Sales growth
The similarities of the Gillette and Procter & Gamble organizations structures are remarkable,
with both companies using global business units to maximize brand strength and growth, and
market based commercial selling units to assure local customization and flexibility. The results
should be a smooth integration that will produce the ability to move Gillette products through the
existing Procter & Gamble infrastructure very efficiently. This combination will enable our
businesses to create more value in more ways than would ever have been possible as a stand-alone
company. The Gillette as a target after acquisition can get higher sales growth under the
combining synergy effect from PROCTER & GAMBLE deal. So we reset the assumption of Sales
growth to 15% since the fourth year after the deal, that is to say, the estimated sales growth from
2008 will be reassumed as 15%.
Then we can input the above input to the Excel Spreadsheet created by us. We can get the Value
of Gillette as target after acquisition. See Table 5.7
From the result, we see that the equity of Gillette is valued at $65.164 billion or $64.71per share
as an independent firm.
8/12/2019 Gillette Valuation Report
27/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
25
Table 5.7
8/12/2019 Gillette Valuation Report
28/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
26
5.5 Value of merger benefitsSince for the M&A deal the value of target after acquisition, value as an independent firm and
value of merger benefits satisfy the following equation:
Value of target after acquisition=Value as independent firm + Value of merger benefitsSo we can rearrange the equation:
Value of merger benefits= Value of target after acquisition - Value as independent firm
From the above formula, we can estimate the merger benefits for PROCTER & GAMBLE from
this M&A deal.
Table 5.8 Value of Merger Benefits
CategoryValue of Target
After acquisition
Value as an
independent firm
Value of
Merger benefits
Valuation of total equity
(Billion, $)65.16 51.28 13.88
Valuation per share
($ per share)64.71 50.92 13.79
5.6 Conclusion(1) Procter & Gamble should buy Gillette because the value of merger benefits is positive and
quite high to it. After the acquisition, PROCTER & GAMBLE and Gillette can share the
$13.88 billion merger benefits together.
(2) Under our assumptions, Procter & Gamble should pay from $51.28 billion to $65.16 billion to
Gillette for buying the 100% share. Finally, PROCTER & GAMBLE paid $57 billion for this
deal, which is within the above range.
8/12/2019 Gillette Valuation Report
29/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
27
Appendix:Appendix 1
8/12/2019 Gillette Valuation Report
30/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
28
Appendix 2
8/12/2019 Gillette Valuation Report
31/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
29
Appendix 3
8/12/2019 Gillette Valuation Report
32/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
30
Appendix 4
8/12/2019 Gillette Valuation Report
33/34
8/12/2019 Gillette Valuation Report
34/34
Gillette Valuation Report: Procter & Gamble Acquires Gillette Case
Appendix 6