Updated from Jan. 28

Consumer products giant Procter & Gamble ( PG) is paying a huge price to acquire Gillette ( G), a $57 billion deal detailed Friday that handsomely rewards billionaire Warren Buffett.

With its 2005 earnings estimated at $1.90 a share, the deal values Gillette at over 28 times its earnings, a rich valuation in an industry in which P&G trades closer to 18 times earnings and rival Colgate-Palmolive ( CL) fetches 22 times earnings. The price suggests Gillette's largest single shareholder, Buffett's Berkshire Hathaway ( BRKA), drove a hard bargain for a company that P&G has long coveted.

For P&G, it's the biggest transaction in the company's history. It will exchange 0.975 of its shares for each share of Gillette, which is based in Boston.

The deal was being treated accretively in the stock market, with Gillette adding about $5.5 billion market capitalization compared with the $3.89 billion in dilution suffered at P&G late Friday morning.

Gillette shares finished regular NYSE trading Friday at $51.60, up $5.75, or 12.54%. P&G finished Friday's action at $54.15, lower by $1.17, or 2.11%

Gillette shares hit a 52-week high of $45.90 on Thursday, having added 23% in 2004. P&G stock has risen 32% in the past two years.

Berkshire owns about 96 million shares in Gillette. Buffett, who said he plans to own 100 million P&G shares when the transaction closes, called the buyout "a dream deal" that will "create the greatest consumer products company in the world."

"Dream" about covers it. Buffett acquired his stake in Gillette in 1989, buying $600 million in convertible preferred stock to amass an 11% stake in the company. Friday's announcement brings Berkshire's return on the investment to roughly $4 billion.

Buffet will have to spend about $370 million at current prices to bring his stake to 100 million shares.

P&G said it expects the deal to bring in $1 billion to $1.2 billion in cost synergies in three years, and it is raising its annual sales growth target from 4%-6% to 5%-7%. Also, by the end of the decade, the company expects to enjoy a 500-basis-point improvement in operating margins.

"That would be very significant," said Morningstar analyst Lauren DeSanto. "This is obviously a good deal for Gillette shareholders. For P&G shareholders, it's really a matter of whether the promised synergies and the margin expansion that the company foresees with this deal can really be realized.

"These are two very complementary companies and their cultures will work well together and both are pretty innovative," DeSanto added. "It's a pretty rich deal, but it's one I think could end up working out."

To P&G's stable of health and beauty aids Gillette will add a suite of shaving products including the Mach 3 and Venus razors, Braun shavers, Duracell batteries and Oral-B toothbrushes. The move marks a shift in focus for P&G towards the men's market, having already expanded its reach into women's markets with acquisitions of companies like Clairol and Wella.

The merger is certain to shake up the consumer products industry, as a new wave of consolidation seems to be taking hold in the public markets. But DeSanto doesn't foresee any more deals coming in this space.

"Right now, I don't see too many other big deals out there like this," she said. "That's not to say that some of these companies might not try to make that happen anyway. If I were any of P&G's competitors, this is not something I would want to hear."

Gillette's chairman, president and chief executive, James Kilts, has agreed to stay on for at least a year. He is expected to join P&G's board and become a vice chairman overseeing Gillette's business, having engineered a successful turnaround at the company since he took the reins in 2001. It's unclear what will happen to the rest of Gillette's executives. Both companies plan to cut 4% of their combined workforce of about 140,000.

P&G intends to follow up the acquisition with stock buybacks totaling as much as $22 billion over 12 to 18 months. Over time, the company said this would result in a total financial impact on the company as if the deal had been structured with about 60% stock and 40% cash.