Business Focus
Procter & Gamble Casts Offer For Hair Dye, but May Hit Snag
By EMILY NELSON
Staff Reporter of THE WALL STREET JOURNAL
Procter & Gamble Co. has a mess at home. So how can the
maker of Tide, Mr. Clean, and Bounty be thinking of adding
something else to worry about?
P&G Chief Executive A.G. Lafley is in the midst of cutting
17,400 jobs, shedding big food brands, and playing catch-up
to rivals in paper goods. Yet the company is bidding about $4
billion to $4.5 billion to buy Clairol from Bristol-Myers Squibb
Co. in what would be P&G's largest-ever acquisition. P&G
would get a hefty management challenge: integrating
Clairol's five factories and marketing the brands, which have
been on the auction block since last fall and face tough
hair-color competition from rivals L'Oreal SA and Revlon Inc.
P&G and Kao Corp., the Japanese
consumer-products maker whose brands
include Jergens and Biore, have bid in
the auction for Clairol, say people
familiar with the matter. Spokesmen for
the companies declined to comment. A
spokesman for Bristol-Myers Squibb also
declined to comment on the auction.
If P&G pays $4 billion to $5 billion for
Clairol, the deal, excluding any benefits
from combining operations, would "very
slightly" hurt earnings, by about five
cents a share in the first 12 months,
according to Heather Hay Murren, an
analyst at Merrill Lynch. Clairol had $2.06 billion in sales last
year; its U.S. sales fell 4% while international sales fell 9%,
she says. Considering P&G's $40 billion in annual sales, she
considers the acquisition manageable.
P&G, though, doesn't have much experience integrating
large-scale acquisitions. Its biggest purchase so far -- paying
$2.05 billion for Iams pet food in 1999 -- in some ways was
easier because Iams's headquarters in Dayton, Ohio, are near
P&G's in Cincinnati. P&G didn't have to combine factories,
and it got a fast sales jump from Iams by calling on
relationships with large retailers and existing distribution
system.
Clairol, which also makes the Herbal Essences line of
shampoos and skin-care products, has headquarters in
Stamford, Conn., with an office in New York City. Clairol
would be a global project, with its factories in Mexico,
Australia, Venezuela and the United Kingdom.
P&G may face antitrust hurdles. It already is the biggest
shampoo seller at U.S. mass-market stores. Clairol is the
third-biggest shampoo company and the No. 1 hair-care
products company in the U.S. P&G could get a deal approved
if regulators include the professional hair-care market, which
includes salons; otherwise it might have to shed some lines,
further complicating the transaction, according to some
analysts.
P&G admits it has a hard time with disruption. Last year,
when the company reported poor results, executives blamed
the confusion of launching many new products while
overhauling the company-wide organization, saying P&G
"tried to do too much, too fast."
Several major investors say they are on the fence about a
Clairol acquisition, and P&G would have to sell Wall Street on
the strategy. When it contemplated -- but walked away from
-- a major pharmaceutical deal in January 2000, P&G's stock
was pummeled. A drop in stock price would carry a particular
sting now, because it would make cutting jobs harder. Most
P&G employees have a large chunk of their retirement
savings in P&G stock, and would be less likely to take
voluntary early retirement if their nest eggs shrink.
Several institutional investors said they wouldn't support the
deal unless P&G sheds other product lines to narrow its
focus.
Some see signs P&G is starting to prep the market for an
acquisition. In a conference call to discuss P&G's quarterly
results last week, Mr. Lafley spoke at length about hair care
and beauty care, citing those businesses as successful and
further along in a turnaround than other parts of the
portfolio. While there has been talk of it swapping
health-care brands for Clairol, P&G disclosed in a November
Securities and Exchange Commission filing that it isn't
considering trading those assets for Clairol. Mr. Lafley also
praised the health-care operation last week.
Even if P&G would prefer to make an acquisition when
operations are in better shape, it can't control the time at
which brands are for sale, executives have said. "If they wait
for the right timing, then in all likelihood, the opportunity will
be passed," Ms. Murren says.
In fact, many brands that shoppers think P&G invented --
such as Cover Girl, Max Factor and Noxema -- in fact were
acquired from others and overhauled. Pantene shampoo was
an overlooked extra when P&G bought Richardson-Vicks in
1985 for its cough and cold medicine. In a decade, P&G
turned Pantene into a leader in the $1.8 billion U.S. shampoo
market.
P&G is best as a brand administrator, and Clairol returns it to
that strategy, several former executives say.
P&G, with products including Head & Shoulders, Pert, Vidal
Sassoon, and Physique as well as Pantene, has been
capitalizing on its position as the biggest shampoo maker.
The company recently pushed big chain stores to change the
way they stock hair-care products. Instead of shampoo in one
part, and other styling products such as gel and hair spray in
another, stores have been asked to display products by
brand, so Pantene shampoo is next to Pantene mousse, says
Patrice Louvet, North American marketing director for
Pantene. Sales of add-on products increase with this display,
Mr. Louvet says. The same strategy could be used for Clairol.
Given P&G's shampoo stronghold, the appeal of Clairol lies in
its hair-color lines. Hair dye is a fast-growing and lucrative
market, appealing to aging baby boomers as well as younger
women and men who experiment with color. Sales of
hair-coloring products rose 6.7% for the 52 weeks ended
March 25, while shampoo sales increased 1.5%, according to
Information Resources Inc., the Chicago market-research
firm. Clairol and L'Oreal dominate hair-color sales; with a
41% share of the market, L'Oreal is just ahead of Clairol,
which has a 37% share, according to IRI.
Some analysts say P&G should simply develop its own
hair-color products. In fact, the company has been doing
small tests with its Vidal Sassoon brand in the U.K. A P&G
spokeswoman says the test is just a chance "to learn" and
declines to comment further.
"The question is, should they build or buy" to get into hair
color? says Dan Popowics, an equity analyst at Fifth Third
Bank in Cincinnati, which counts P&G stock as one of its large
investments. With Clairol, P&G instantly would be a large
player, he says, adding, "It's cleaner. You avoid the pitfalls
and start-up expenses."
Write to Emily Nelson at emily.nelson@wsj.com