P&G's $57bn Gillette deal sets fresh challenge for Unilever

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The Independent Online

Procter & Gamble yesterday created the world's biggest personal care company with the $57bn (£30bn) acquisition of Gillette in a move that will pile the pressure on an already embattled Unilever.

For starters, the Anglo-Dutch maker of Dove soap and Lipton tea, which issued a profit warning in September, looks set to lose its prized emerging market crown following completion of the deal this summer, analysts said.

Unilever will also face much greater competition for shelf space in the lucrative US market because the enlarged P&G will have far greater clout with retailers such as Wal-Mart.

P&G has ratcheted up the pressure on Unilever during the past few years by slashing the price of its detergents in traditional Unilever strongholds such as India. The US group has also spent more money on marketing its products such as Olay lotions and Tide detergents.

Andrew Wood, an analyst at Bernstein, in New York, said: "Through competitive actions, and through the acquisition activity, P&G are quickly removing Unilever's competitive advantage in these important markets."

The deal, which was unveiled yesterday morning, prompted fevered speculation across European stock markets that consumer goods companies such as Reckitt Benckiser, Bic and Clarins could attract bid interest. Shares in Reckitt, home to Vanish soap and Mr Sheen cleaning products, soared 42p to 1,582p, while Bic, the biro and razor maker, rallied 11 per cent.

Graham Jones, at Lazard, said: "We see Reckitt/Colgate as a powerful combination in fast-moving consumer goods." Another analyst added" "P&G's deal says everything is possible." She said a 12-month tax break for US companies repatriating foreign earnings in return for reinvesting in US assets could also prompt more US/European takeovers.

After stumbling in the late 1990s, P&G has made up for lost time. Its organic sales soared 7 per cent during the past three months; Unilever's are expected to barely move. The Anglo-Dutch company's much-vaunted "Path to Growth" has ended badly with quarter after quarter of missed sales targets.

Unilever is widely expected to slash its margin and sales targets yet again when its new co-chairman Patrick Cescau, unveils the results of his strategic review in two weeks' time. He may also yield to investor pressure and separate the co-chairmen's role.

"P&G and Gillette are top of the class at driving top quality, consumer-driven innovation, which has driven their outperformance. The merger will intensify that competitive platform," one analyst said. Another added: "It's a warning to Unilever on the trading front. P&G and Gillette have a very strong record in their categories. This gives Unilever a bigger headache and one that won't go away."

Some analysts said the merger would give the two companies greater leverage with large retail chains, notably Wal-Mart, which accounts for 17 per cent of Procter & Gamble's sales and 13 per cent of Gillette's and has a reputation for squeezing suppliers to cut prices. The new look P&G will have 21 brands worth $1bn; two-thirds of its total sales will be in the all-important "category champion" position. "Retailers can't afford not to stock their brands. The merger is an attempt to increase the balance of power with the big supermarket groups," one analyst said.

One winner from yesterday's deal was the veteran US investor Warren Buffett, the chief executive of Berkshire Hathaway. Since 1989, he has built up a near 10 per cent stake in Gillette, where he was a board director for 14 years.