P&G Investors Welcome $57B Deal But Price Weighs

Some shareholders of Procter & Gamble Co. (PG) on Friday welcomed the agreement to buy Gillette Co. (G) for $57 billion in stock, but some worried that the price may be too high.

P&G shareholders contacted by Reuters saw the business logic of the combination, which brings together two iconic U.S. producers of household goods ranging from Pampers diapers to Duracell batteries.

The combined company would boast more than $60 billion in annual revenue, giving it increased leverage at stores ranging from discounters to grocers.

The deal helps P&G further grow key businesses like personal and health care. For Gillette, P&G's global reach will help it sell more razors and batteries in big developing markets like China.

The deal values Gillette at $53.94 per share, an 18 percent premium to its Thursday closing stock price.

The deal also values Gillette at 28 times projected 2005 earnings, a 40 percent premium over Colgate-Palmolive Co.'s (CL) price/earnings ratio of 20 and double the P/E ratio of battery maker Energizer Holdings Inc. (ENR).

Glasgow, Scotland-based Britannic Asset Management, which owns P&G stock, welcomed the deal but acknowledged the hefty valuation.

"You can't say it's a bargain price -- but we are reasonably positive on the deal," said Douglas Wright, fund manager at Britannic, which manages $25 billion of assets.

"It's not a cheap valuation, but they are buying a quality company which has strong positions. Gillette complements P&G's businesses -- you have to pay up for quality."

Cincinnati-based P&G is swapping 0.975 shares of its stock for each Gillette share. P&G said its plan to buy back $18 billion to $22 billion of stock over the next 18 months means, essentially, that it is buying Gillette for 60 percent stock and 40 percent cash.

One P&G investor, Fred Burke, president of Johnston Lemon Asset Management in Washington, D.C., was comfortable with the price.

"That's not a problem," said Burke. "When they buy back $20 billion of stock and get this thing down to a realistic number -- I think it still works.

"I think the price/earnings multiple will drop a bit once everybody understands exactly the financial implications of it." Johnston Lemon manages about $170 million and P&G represents about 3 percent to 4 percent of its holdings.

Burke enthused about the marketing might of the combination. "You have two marketing forces -- you could integrate them and create a real marketing powerhouse. Put them together and you might be able to do some real numbers."

The deal would give P&G strength in categories where it currently has little presence, including shaving supplies, where Gillette ranks No. 1 worldwide. It also expands P&G's retail shelf space.

"There is a business fit -- but it seems like a pretty excessive price," said Donald Yacktman, president of Yacktman Asset Management, who said some of his clients own P&G stock.

"Clearly there will be economies of scale. That's what would possibly justify those kind of prices -- but the prices are really high."

Gillette shares gained 13 percent to $51.60 on the New York Stock Exchange (search), while P&G slipped 2.1 percent to $54.15.