Rebounding Gillette Could Make a Nice Catch for Big Rivals

Now that Gillette (G Quote) is starting to put its fiscal house in order, some analysts are wondering if it's beginning to look like a fixer-upper to its rivals, namely Procter & Gamble (PG Quote) and Colgate-Palmolive (CL Quote).

When it reported weak third-quarter results Oct. 21, Gillette said it was weighing the sale of dud businesses like its stationery and small household appliances, and aiming to beef up its capital management -- moves for which investors have been pressing. Working off excess European inventories will mean lower sales and earnings in the fourth quarter, though growth is expected to resume in the first quarter, Gillette said.

While analysts cut their estimates in response to the gloomier outlook, they say they're glad Gillette is finally addressing its problems. And with its shares languishing near a 52-week low, Gillette may be ripe for a takeover by a rival jonesing to get its hands on the Boston company's Mach 3 razor and Duracell battery businesses, analysts say. (Gillette, P&G and Colgate say they don't comment on acquisition or takeover activity.)

"What you have is two great global franchises and some evidence that the company hasn't been run as efficiently as it could have been in the past year," says Mark Godfrey, an analyst with Invesco, which owns around 33,000 shares of Gillette. "That creates opportunities for others that run their businesses in a disciplined way."

P&G and Colgate, in contrast to Gillette, are both getting credit from the Street for having weathered the consumer-products storm, offsetting weakness in emerging markets with strong new product lineups and tight cost controls. Their shares are both trading near 52-week highs. Andrew Shore, longtime consumer-products analyst at PaineWebber, says Gillette is "highly vulnerable" to a takeover, with Cincinnati-based P&G the most likely buyer. "It would be a great company-transforming acquisition," Shore says. (He rates both P&G and Gillette shares attractive, and his firm has done recent banking for P&G, but not Gillette.)

Could Gillette's batteries and blades supercharge P&G or Colgate?

Gillette Products

Source: Gillette

Procter & Gamble Products

Source: Procter & Gamble

Colgate Products

Source: Colgate-Palmolive

As part of its ridiculously named program, Organization 2005, P&G is committed to deriving between 1% and 2% of its targeted 6% to 8% annual sales growth from acquisitions. It likes to buy technology that it can use elsewhere in its massive catalog of products -- so Mach 3's shaving system, for instance, could show up in an entirely new P&G brand. But P&G has already made two recent purchases, including its biggest buy ever, the $2.3 billion purchase of Iams, which makes pet food for the Lexus set. While a bid wouldn't be surprising, "having just closed that two months ago, undertaking something this radical" might not be high on its list, Godfrey says.

Burt Flickinger, managing director of Westport, Conn.-based Reach Marketing and an avid P&G-watcher, says he doesn't think P&G's chief executive, Durk Jager, would shy away from another big purchase. "While he's done a brilliant job at building up international businesses, he needs big global brands to take on the Nestles and the Unilevers (UL Quote)," he says. With Gillette's share price down, Jager may see this as the time to act, he says. (Flickinger's firm has done recent consulting for both P&G and Gillette.)

New York's Colgate, which is also outperforming Gillette, is Banc of America Securities analyst William Steele's choice for a prospective bidder. While he's not convinced that Gillette is an imminent target, Steele says a bid by like-sized Colgate would likely result in a merger of more-or-less equals.

He says Colgate would be more willing than P&G to take on new product categories, such as the ailing Braun and stationery businesses. The question for Colgate is whether "they'd want to pull off something this huge," Invesco's Godfrey says. (Steele rates both Gillette and Colgate shares market performer, and his firm hasn't done recent underwriting for either.)

Regulators shouldn't be a problem: Analysts say neither Colgate nor P&G would face antitrust problems with a Gillette bid, since batteries and blades would be new businesses for both. The only potential overlap is in toothbrushes, where Gillette has about a 27% U.S. share and Colgate has a 21% share.

Godfrey says any bid would likely be friendly: Gillette managed to stay independent despite two hostile bids in the 1980s. And Gillette CEO Michael Hawley just took over officially in April, which means he'd likely be resistant to handing over the reins to P&G's Jager or Colgate's Reuben Mark.

But "if the potential acquirer does his homework and offers a price that's fair and at a premium," the board would have to consider it and give a good reason why Gillette is better off going it alone, says Godfrey. "The shares were at 60 earlier this year, so we'd want something above that," he says.

PaineWebber's Shore doesn't think it'd even take that much. With all the disappointments Gillette has handed investors in the past year, "Who wouldn't tender at 40 or 50?" he wonders. The stock is trading at about just under 35 a share. One shareholder who would have to be convinced is Warren Buffett. As of June 30, Berkshire Hathaway (BRK.A Quote) owned 96 million shares, or about 8.7%, of Gillette. The company's second-largest shareholder is buyout firm Kohlberg Kravis Roberts, which has filed to sell all or part of its 4.7% stake. Neither returned phone calls for comment.

Not everyone is licking their chops. "I'd be disappointed," says Catherine Lewis, analyst with Morgan Stanley Dean Witter, who rates Gillette shares a neutral. (Her firm has done underwriting for Gillette within the last three years.) "I'd love to see this company continue its heritage. That said, they've got to start delivering. Shareholders are frustrated."