P&G VS. NEW PAPER POWERHOUSE; KIMBERLY-CLARK, SCOTT DEAL POSES BIGGEST PERIL TO SMALLER BRANDS

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A strong new competitor to Procter & Gamble Co. approached the world stage last week with the proposed merger of Kimberly-Clark Corp. and Scott Paper Co. But analysts say the biggest losers in the deal could be smaller brands caught in the crossfire.

The $6.8 billion deal would give Kimberly-Clark marketing power comparable to P&G's across a broader range of paper and personal-care products in North America and Europe, and make the already difficult life of second-tier players even harder, analysts say.

The deal, however, could also raise regulators' eyebrows in Washington and Brussels. One Washington antitrust lawyer said competitive issues posed by the merger warrant investigations that could last at least three months in the U.S. and five months in Europe.

"The notion that [Scott and Kimberly-Clark] have been advancing that there are no antitrust issues here is kind of silly," said Joe Sims, a Justice Department antitrust official in the 1970s and now a lawyer with the Washington office of Jones, Day, Reavis & Pogue, which represents P&G in several areas. "They may well think they have some answers, but there clearly are some big issues."

P&G isn't waiting for the newly conceived giant to be born. It quickly went on the antitrust offensive, firing off a statement shortly after the deal was announced.

"We're talking about issues that are really global," a P&G spokesman said. "In Europe, market share data show Kimberly-Clark would have significant market share increases in several categories."

Silvermine Consulting President Paul Kelly said: "I am surprised P&G would bring up [antitrust], considering their own sensitivity in some categories." The Westport, Conn.-based Mr. Kelly speculated P&G may want to divert Kimberly-Clark's attention from a tough fight over the diaper business in Europe.

Reaction from competitors and retailers would be important factors in the outcome of any investigation, Mr. Sims said.

While P&G came out firing, smaller competitors have yet to take official positions on the antitrust issues and downplayed potential negative impact from the deal.

"We don't see [the merger] having a significant impact on Fort Howard" Corp., said a spokesman for the Green Bay, Wis., company, which competes in most of the affected categories.

But that may be whistling in the graveyard.

"The Kimberly Clark-Scott combination will make it more difficult for Proctor & Gamble to successfully reach the paper consumer, but it will also turn up the heat dramatically on both James River and Georgia Pacific," said Burt P. Flickinger, an independent consultant.

No major domestic changes are foreseen in industry structure from the deal, said Jay Freedman, analyst with Lincoln Capital Management in Chicago. Mr. Freedman said he sees more impact in Europe, where Scott's distribution system can take Kimberly-Clark beyond "just lobbing some grenades and trying to establish a beachhead."

"A company like Procter will still have top brand-name recognition in most of the categories" in both continents, said William Steele, analyst with Dean Witter Reynolds in San Francisco. But the added product breadth of Kimberly-Clark and Scott would give the merged company significant new category management ability throughout in the U.S. and Europe.

"It doesn't bode very well for the James Rivers and Georgia-Pacifics of the world," Mr. Steele said. He added that Molinique, which now has strong No. 2 brands in several European categories, could also be hurt.

James River Corp. turned the tables on the merger partners by saying any industry shakeout could hurt weaker Kimberly-Clark and Scott brands more than its own.

Richmond, Va.-based James River currently has the No. 2 brands in both paper towels (Brawny) and toilet tissue (Northern), a spokesman said.

"Retailers don't like to see too much power concentrated in the hands of any one competitor," said Richard Elder, VP-corporate communications. "It may sound straightforward that [Kimberly-Clark and Scott] just muscle their way in and squeeze out other competitors. But history would say that doesn't just happen that simply....A weak brand that's acquired by a strong company isn't necessarily going to be any better off."

A big question in the deal is whether Kimberly-Clark can resuscitate Scott's marketing, Mr. Kelly said. "Scott has done a miserable job of marketing for the last 10 years. They have given away the product. Kimberly doesn't like to market that way and will try to evolve the marketing to a higher level, but I'm not sure they can."

Kimberly-Clark, with revenues of $7 billion, spent $120 million on U.S. advertising in 1993, according to Advertising Age estimates. Scott, with revenues of $4.7 billion, spent only $9.4 million on measured media in the U.S.

Combining Kimberly's brand marketing support knack with Scott's budget brands could produce a "pincer movement" that poses a major threat both to P&G and smaller players, said Larry Light, president of Arcature Corp., a Stamford, Conn., marketing consultancy. "The merger suddenly brings marketing dollars to a segment I think would be very responsive."

On the agency side, aftershocks from the merger might not have much effect on the Kimberly-Clark or Scott rosters.

While the marketers and their agencies were unwilling to speculate on changes, the proposed combination doesn't appear to raise serious concerns for either company's agencies.

Three shops handle most of Kimberly-Clark's advertising-Foote, Cone & Belding, Chicago, has all Kleenex advertising, for facial and bathroom tissues; Ogilvy & Mather, New York, handles Huggies and Kotex; and Campbell Mithun Esty, Minneapolis, has Depend incontinence products.

The accounts at O&M and CME look secure because Scott doesn't have competing brands, with the exception of Huggies baby wipes. Scott does have numerous tissue brands, but most are priced lower than Kleenex, putting them in a different segment of the market.

"The combination of Ogilvy with Foote, Cone & Belding will give Procter & Gamble's paper agencies Ayer, Burnett, DMB&B and Jordan McGrath Case a very tough challenge. Kimberly-Clark has a superior database and direct consumer marketing and a more consolidated power agency base. The Kimberly-Clark paper management team .... has a proven record of success in taking on the Procter paper giant and winning where others have lost, failed or given up," Mr. Flickinger said.

Scott's three agencies have been enjoying the rebirth of advertising at the company. For almost a decade, Scott barely advertised its products in the U.S. In the past two years, it has begun to advertise again, bringing campaigns that worked elsewhere in the world to the U.S.

Just last week Scott selected Shandwick USA, New York, to handle international public relations and database marketing for its $1.3 billion Away-From-Home commercial business. Shadwick, with help from Howard, Merrell & Partners, Raleigh, N.C., will aid in the launch of an unprecedented number of new products following Scott's recent acquisition of Kimberly-Clark.

In November 1994, Scott announced it was consolidating all of its advertising around the world with three agencies.

McCann-Erickson Worldwide, which had been doing Scott work in Asia and Europe, became the global agency for paper towel brands, including ScotTowels and Viva in the U.S.

J. Walter Thompson Co., also already on the roster in Europe and Asia, became global agency for almost all bathroom and facial tissue brands.

Bozell Worldwide became a new Scott agency, picking up global responsibility for baby wipes and Cottonelle tissues.

As brand-new appointees for the company being acquired, these agencies could be more vulnerable to merger-related business losses. But Kimberly-Clark is buying Scott in part because of its strong businesses outside the U.S., and in the cases of JWT and McCann, that's probably a good sign.

Pat Sloan and Mark Gleason contributed to this story.

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P&G feeling the heat

While a combined Kimberly-Clark and Scott would still trail Procter & Gamble in worldwide revenues by a large margin, P&G would be seriously pressured in the paper-products category.

REVENUES & AD SPENDING

1993 1993

worldwide U.S. ad

revenues spending

Kimberly-Clark $7 billion $120 million

Scott $4.7 billion $9.4 million

Procter & Gamble $30.3 billion $2.4 billion

DOLLAR SHARE OF MARKET

Toilet Facial Paper

tissue tissue towels

Kimberly-Clark 6.8 46.9 1.8

Scott 19.3 6.9 16.5

Procter & Gamble 28.9 31.6 36.1

Sources: Advertising Age (revenues & ad spending); PaineWebber (shares)

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