• JANUARY 28, 2005

P&G and Gillette deal: Implications?

Reportedly, Proctor and Gamble (P&G) has plans to acquire Gillette globally. Though this is yet to be confirmed, we analyse in this article, the implications of the same on the Indian subsidiaries respectively.

P&G - An introduction
P&G is a 65% subsidiary of the FMCG major, P&G USA. In India, the company is a focused two-product company, dominating both segments backed by strong brands, namely 'Vicks' in the anti-cold segment and 'Whisper' in feminine care segment. The parent has two other 100% subsidiaries in India which have a dominant shampoo and detergent portfolio. P&G undertakes contract manufacturing for its parent's detergent portfolio (Ariel, Tide) in India.

Gillette - An introduction
Gillette India is the 52% subsidiary of US shaving major - Gillette USA. The company's promoter group together hold 88.8% in the company, leaving very little liquidity for the public. The company has just come back into the black in 2003 after a spate of restructuring in 2001 and 2002. These years saw Gillette hive off its battery manufacturing plant (Duracell) at Manesar. The period also saw cash infusion from the parent, which helped it restructure and pay of all its debt. It is now a focused shaving products major, which also markets the Duracell range of batteries.

What is the implication?
Without attempting to speculate, it is without doubt that the acquisition, if turns out to be true, is a big positive for P&G in India. However, investors have to be aware of two factors here. One, P&G, besides the listed company in India, has other 100% subsidiaries in India. In fact, products like Ariel and Pantene are marketed through the 100% subsidiary and the listed entity (P&G Hygiene) has only two major brands in its portfolio i.e. Vicks and Whisper. Even if the deal goes through, it is unlikely that P&G Hygiene will get access to the Gillette folio. They may at best be marketers or manufacturers of some of the Gillette products.

Secondly, even if the listed entity is chosen for consolidation in India, whether P&G has resources to make the open offer to increase its stake in Gillette India also is an issue to be considered. P&G, as of June 2004, had a cash balance of Rs 2.2 bn (at the current price and keeping in mind the cash balance, P&G could buy around 10% stake in Gillette India). The cash infusion by the parent major could be other option if the listed entity is decided to be the holding company.

Our view
As we have maintained before, P&G (the listed company) is basically a two-product company, albeit with strong brands in the respective segments. In this context, the risk profile is higher. Besides, historically, the presence of other 100% subsidiaries in India has meant that valuations are not commensurate with other MNC FMCG majors that are listed in India.

As far as Gillette is concerned, the company has gone through significant restructuring in the last two to three years. The benefits of the same are apparent from the improvement in operating margins during this period. Though valuations are higher, the stock commands a premium owing to its strong brand, which is a big entry barrier. The low liquidity in the stock could also be an indication that the management may take the company private. The stock has run up 11% today in anticipation of an attractive open offer by the management to take the company private. But in our view, investors are better off by not making any such speculation. The open offer may or may not come ad if it does come, it may not be at a premium to current valuations.

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