If regulators approve the deal, P&G will add Duracell battery, Right Guard deodorant and Gillette razors to its collection of more than 300 consumer brands, including Head and Shoulders shampoo, Pringles, Crest toothpaste and Bounty paper towels. The acquisition would vault P&G's sales to more than $60 billion annually.
"We believe we can bring these companies together and create a juggernaut," Gillette Chief Executive James M. Kilts told analysts Friday.
Kilts, who has agreed to stay on for at least a year to lead the integration of Gillette with P&G, said the combination would provide Gillette with opportunities to sell their products in developing markets including China and East Europe.
"I'm a great believer in scale," Kilts said. He said he would rather lead the consolidation in consumer products companies than "get stuck with the leftovers."
Both companies' boards unanimously approved the deal on Thursday.
The Federal Trade Commission (search) will do a full-fledged investigation of the deal and may require P&G to divest some brands in overlapping lines of business, such as deodorants and oral care, said Robert Skitol, an antitrust lawyer with the firm Drinker Biddle. "Other than that, the expectation will be that this will be allowed."
Consumer products suppliers have been facing pressure from Wal-Mart Stores Inc. (WMT), the world's biggest retailer, and other retailers to keep their product costs low.
Friday's deal is expected to help P&G and Gillette cut their combined costs but will also mean the elimination of about 6,000 jobs, which is about 4 percent of the combined work force of about 140,000, most of them by eliminating managerial overlaps and consolidating operations.
The P&G-Gillette deal has the key support of billionaire investor Warren Buffett (search), whose Berkshire Hathaway Inc. has a 9 percent stake in Gillette.
Buffett said in a statement he would raise his holding in the combined company by 7 percent, to 100 million P&G shares, a $350 million investment at current prices.
"This merger is going to create the greatest consumer product company in the world," Buffett said. "It's a dream deal."
Analysts estimated that the deal would reduce P&G's earnings by 15 cents to 28 cents a share in fiscal 2006, which begins in July, but said that was outweighed by the strategic benefits.
The deal "creates an enterprise unmatched in geographic reach and competitive positioning ... and targeted synergies of $14 billion-$16 billion are massive," said William Schmitz, analyst at Deutsche Bank Equity Research.
The deal would be the largest transaction since J.P. Morgan Chase & Co. (JPM) purchased Bank One Corp. for $56.8 billion a year ago, according to research firm Dealogic.
P&G, based in Cincinnati, is swapping 0.975 shares of its stock for each Gillette share. The deal values Gillette at 28 times projected 2005 earnings, a 40 percent premium over rival Colgate's price/earnings ratio of 20 and double the P/E ratio of battery maker Energizer Holdings Inc.
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.
Merrill Lynch advised P&G on the deal. UBS and Goldman Sachs acted for Gillette.
"Gillette and P&G have similar cultures and complementary core strengths in branding, innovation, scale and go-to-market capabilities, making it a terrific fit," P&G Chief Executive A.G. Lafley said in a statement.
Kilts will become vice chairman of P&G and join its board.
The deal is a bold move by Lafley, who led the company out of dark times in 2000. Moving too fast on a restructuring plan implemented by Chief Executive Durk Jager, the company posted several disappointing quarters and its stock lost more than half its value in 2000.
Lafley replaced Jager in June 2000, slowed the pace of change and got the company back on solid footing. Its stock has risen by nearly one-third since 2003, with its strong global brands powering consistent sales growth.
As it resumed growth, P&G started acquiring brands that fit with its strategy — Germany's Wella AG hair care line in 2003 for $5.7 billion was the biggest acquisition until Thursday. P&G also acquired Clairol for its hair-care lines and Iams Co. for its pet foods.
The company reported strong quarterly earnings on Thursday, including a 12 percent jump in net income to $2.04 billion, or 74 cents per share, up from $1.8 billion and 65 cents per share in the same period a year ago.
P&G's sales increased 7 percent to $14.45 billion in the quarter.
Gillette also has reported strong earnings since Kilts joined the company in 2001. It has moved to buoy its premium-line shaving and dental care products and sales of Duracell batteries.
In its most recent quarter, Gillette reported income of $475 million, up from $416 million, as more consumers traded up to its pricier M3Power razor and the series of hurricanes in the South boosted battery sales. Gillette also sells Oral B dental care products.
Reuters and the Associated Press contributed to this report.