The Oracle of Omaha has called it "a dream deal". As Gillette's largest shareholder, Warren E. Buffett, Chairman and CEO of Berkshire Hathaway Inc., is delighted with the $57-billion (Rs 2,50,800-crore) deal that created the largest consumer products company in the world. And understandably so. The mega marriage has created a new megacorp with a combined workforce of 140,000, market cap of $186 billion (Rs 8,18,400 crore), 21 billion-dollar brands and potential savings of $16 billion (Rs 70,400 crore). The Boston-based Gillette-a "guy" products company with a leading presence in shaving and grooming products, oral care and batteries-and the Cincinnati-based Procter & Gamble (P&G)-best known for its feminine hygiene products, detergents, diapers and shampoos-together will own the world's largest stable of consumer brands, pushing current numero uno Unilever off its top perch. Says David Bell, Co-chairman of the $5.8-billion (Rs 25,520 crore) InterPublic Group: "The merger further consolidates their position in the retail trade where they already had major positions."

Meanwhile, the Rs 45,000-crore Indian fast moving consumer goods (FMCG) industry is trying to piece together what this development means closer home. "P&G undoubtedly will now be a force to reckon with, but what's more significant is that the parent is sure to take a greater interest in the Indian operations," says Nikhil Vora, Vice President of the Mumbai-based SSKI Securities, who keeps a close watch on the goings-on in the consumer goods space.

In India, P&G operates though two companies-the listed P&G Hygiene & Healthcare and the unlisted P&G Home Products. The former, with a turnover of Rs 586.78 crore and a market capitalisation of Rs 2,011.59 crore, handles Vicks medicated cough drops and feminine hygiene brand Whisper, while global mega brands like Ariel and Tide come under the Rs 507.53-crore unlisted entity. The Gurgaon-based Gillette India (formerly Indian Shaving Products), which closed 2004 with annual sales of Rs 406.31 crore, enjoys a commanding presence in shaving and men's grooming products, alkaline batteries and oral care.

Big Is Still Beautiful

Probably size, or the lack of it, is the biggest reason why in India you do not hear the gushing adulation that greeted the mega deal in the US. The post-merger P&G will remain the proverbial David when compared to the Rs 10,000-crore-plus Hindustan Lever (HLL) Goliath. And smaller Indian companies, too, do not seem unduly perturbed. Says Adi Godrej, Chairman of the Godrej Group: "I do not see it (the merger) having much of an impact on the market, as the acquisition of a wider product portfolio does not automatically confer value." HLL declined to comment on the issue.

The top brass at P&G's spanking new India head office in Mumbai's Andheri, too, is not very forthcoming. All CEO Shantanu Khosla has to say is: "The deal has been announced recently and the plans for the Indian operations are yet to be worked out. It will take quite a while to know the answers to specific questions raised by you. We are, therefore, not in a position to speculate on the outcome of this deal in India." The big bosses at Gillette's Gurgaon office are equally in the dark. "Who am I to talk about these things?" asks Zubair Ahmed, Managing Director of the company, adding that any statement in this regard could get him into serious trouble with the regulators.

But despite this affected diffidence, both the companies seem to have found what they were looking for. P&G's Indian subsidiaries, long hamstrung by a limited palette of offerings, gets instant access to a line-up of male shaving and grooming products and oral care brands that complements its own portfolio. Compared to soaps and detergents, these offer far better growth prospects, as penetration levels are still fairly low. Gillette, though limited to cities and large urban settlements, also brings a loyal consumer base to the table. "They're one of the pioneers in merchandising. Their share of wallet is very high compared to their share of visibility," says Saugata Gupta, Head of Marketing, Marico Industries. That is why Gillette India's stock has historically traded at 37 times earnings compared to P&G Hygiene's 22 times. Combine this with P&G's formidable marketing and brand-building muscle, and you potentially have a combination that is greater than the sum of its parts.

Then there is the mouth watering prospect of cost savings-at a time when all consumer goods companies are getting squeezed between rising raw material prices and falling MRPs. Says Shuhag Ghosh, Senior Manager at international consultant at Kearney: "In global mergers of this size, it's not unusual for 40-45 per cent of the synergy benefits to come from the supply chain side, especially areas like procurement." Of course, all the analysts, industry experts and consultants Business Today spoke to qualified every pronouncement they made by saying that ultimately, the benefits from the merger would depend on the form it finally took.

P&G India (CEO Shantanu Khosla above) gets access to male shaving and grooming products that offer better growth prospects, as their penetration is low

The Road Ahead

That, in turn, depends on the fine print being scripted by Messrs A.G. Lafley and J.F. Kilts, the CEOs of P&G and Gillette, respectively. It's not yet clear if the two P&G siblings in India and Gillette will merge into one company or maintain their separate identities. Significantly, P&G retained Wella India, a hair cosmetics company, as a separate entity after taking over its German parent in 2003. It's also not clear whether the marriage in India will lead to a buyback offer and a subsequent delisting of the shares. According to Securities and Exchange Board of India (SEBI) regulations, global takeovers, which involve a change in management, will trigger its Takeover Code, which makes open offers mandatory. If SEBI decides to treat the case on its merits, then a lot will depend on how it is structured.

The matter is further complicated by the fact that Gillette India's 89 per cent promoter holding includes a 15 per cent stake held by Kolkata-based businessman Saroj K. Poddar, one of the people responsible for bringing the men's grooming company to India. This savvy businessman, who is, incidentally, K.K. Birla's son-in-law, is the largest single Indian shareholder in Gillette India. Poddar, whose holding is worth Rs 330 crore, has been vocal about not only retaining his stake, but also continuing to have a say in matters befitting his status as a promoter shareholder. "We have shown very good results this year (net profit for 2004 rose 37 per cent to Rs 61 crore) despite a 30 per cent increase in promotional spending to Rs 58.29 crore. I have great faith in this company and its management," says Poddar. So also, it seems, do investors. In the US, Buffett, who already owns 96 million Gillette shares, has announced plans to increase his eventual stake in the post-merger P&G to 100 million shares. In India, the P&G scrip rose 4.53 per cent to Rs 612.55 and the Gillette stock jumped 7.1 per cent to Rs 674.65 on the Bombay Stock Exchange, the day after the deal was announced. Since then, the shares have moved down marginally and stood at Rs 611.80 (P&G) and Rs 666.15 (Gillette) as on February 4, 2005, respectively. But this is still substantially above the level at which they stood on the day the merger was announced.

Gillette India's (MD Zubair Ahmed above) share of wallet, and P&G's brand and marketing muscle, is a combination that is greater than the sum of its parts

Globally, the merger has already led to the announcement of 6,000 job cuts, but no immediate retrenchment or rationalisation of manufacturing facilities are expected in India as there is no overlap of products. Planned cuts, if any, will also take a long time coming. Typically, global mergers of this scale-like P&G's previous takeovers of Clairol and Wella or HLL's Brooke Bond Lipton mergers-take years to fully consummate.

The marriage comes at a time when the Indian FMCG industry is developing a taste for acquisitions. Led by the recent Dabur takeover of some Balsara brands, the signs are encouraging. Seven out of the eight FMCG companies, which recently declared quarterly results, made profits. Innovative new products are being introduced in categories ranging from tea to chocolates. Ad spends have stabilised and the most encouraging sign is that P&G and HLL have raised prices of detergents, something which should enable them to improve their margins. "I will not be surprised if FMCG is the joker in the pack this year," prophesises Amitabh Chakraborty, Vice President & Head of Research, Kotak Securities.

While P&G traditionally has a reputation for rewarding its club agencies, the ad world is guarded on what this would mean for the industry. "One less advertiser means there will more pressure on ad agencies, although the lucky one(s) will get a larger size of the pie," says Sam Balsara, CMD, Madison Communications, who does media buying for P&G, cautiously. All eyes, then, are trained on Cincinnati.

-additional reporting by Kushan Mitra