Package deals

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Get set for the next wave of package goods mergers--but don't look at the food aisle. A series of deals is expected in categories ranging from shampoo to soap to batteries, and the slowing economy could speed up this consolidation.

Seven major acquisitions reset the food and beverage industry in the last six months--Philip Morris' Kraft Foods with Nabisco Foods; Unilever with Bestfoods; Kellogg Co. with Keebler; General Mills with Pillsbury; PepsiCo with Quaker Oats; Nestle Foods with Ralston Purina; and ConAgra Foods with International Home Foods.

There has been only one big deal on the non-food side-Georgia-Pacific with Fort James Corp. (See story, p. 40). But observers think

a spate of non-food acquisitions could be happening fast. "Sometimes it just takes one deal to be that tipping point," said William Steele, analyst with Banc of America Securities.

That tipping point may well come from Bristol-Myers Squibb Co., which is shopping its Clairol hair-care business with a sale expected later this year. That move may provide the spark for left-out bidders to seek other options, swap or sell brands. The heat is on for other companies to sell, too, including Dial Corp., which industry-watchers predict could be the next domino to fall.

In a report last year, Mr. Steele argued that both big and small players are under pressure to merge. Major players need acquisitions to gain cost savings that will rekindle earnings growth, while small players face being overwhelmed by increasingly large retail customers and competitors, he said.

"In this period of slowing earnings growth, industry consolidation has been a big topic," wrote Amy Chasen, analyst with Goldman Sachs, in a report earlier this month. "In fact, consolidation may be inevitable in this environment of difficult industry dynamics."

But enthusiasm for new deals could be dampened by some of those "difficult dynamics" stemming from old ones. Deutsche Bank Alex. Brown analyst Andrew Shore dates the troubles that ultimately led to the firing of Gillette Co. Chairman-CEO Michael Hawley last October to disappointing results from the company's 1996 acquisition of Duracell. Likewise, Newell Rubbermaid President-CEO John McDonough was ousted after the company's 1999 acquisition of Rubbermaid didn't produce expected results. And Clorox Co. stock was recently trading 47% below its all-time high of $64 reached before its 1999 acquisition of First Brands.

Moreover, some of the industry's biggest potential non-food acquirers are still busy digesting other acquisitions. Unilever's shopping spree in 2000, which saw it purchase Ben & Jerry's and Slim Fast in addition to Bestfoods, turned the company from cash-rich to debt-laden nearly overnight. Procter & Gamble Co. has $60 billion less market value to carry off a deal than it had last January, when news of the company's interest in Warner-Lambert Co. and American Home Products began a steep slide in the company's stock, a slide ultimately fueled by earnings disappointments.

That $60 billion might have paid for Gillette, a company with a current market value of $36 billion that rebuffed a takeover overture in late 1999 from former P&G Chairman-CEO Durk Jager, according to industry watchers.

Kimberly-Clark Corp., perhaps the best performer in the non-foods industry in terms of sales and earnings growth the past two years, isn't banking on big acquisitions. Chairman-CEO Wayne Sanders told investors at a Goldman Sachs Consumer Products Conference earlier this month that he projects about 1%-2% annually in sales growth from acquisitions, which means Kimberly-Clark would be seeking a company of less than $300 million in annual sales-smaller than even some of the smallest U.S. package-goods companies, such as Playtex Products, which has annual sales of more than $800 million. But Mr. Sanders did express interest in Georgia-Pacific's European tissue and towel brands, should the company decide to sell them.

In an interview, Mr. Sanders acknowledged that acquisition prospects in the U.S. paper business have largely been snatched up in recent years, but said prospects overseas remain plentiful. He said he's not currently looking to expand into areas outside of paper products that would add a "fourth leg" in addition to K-C's existing infant-care, personal-care and health-care businesses.

In a report last year, Mr. Steele cited Clorox and Playtex as good fits for Kimberly-Clark. Playtex, with its relatively modest size and concentration in infant and personal care, would appear the best fit among U.S. companies.

Gillette, with its global dominance in men's shaving and its battery brand Duracell, is currently the biggest prize in the non-food acquisition rumor mill. But finding a taker with the muscle and will to buy the $9.5 billion company could be tough, even if Gillette's board proved willing.

Colgate-Palmolive Co. was cited in a report by Ms. Chasen last year as a potential partner for Gillette. And Colgate Chairman-CEO Reuben Mark wasn't quick to dismiss interest in Gillette when asked by Ms. Chasen during the Goldman Sachs conference earlier this month.

He suggested investors ask Gillette Acting CEO Ed DeGraan and Kohlberg Kravis Roberts & Co. founding partner Henry Kravis, who were also on the conference agenda, about their interest in a deal. Neither Messrs. DeGraan nor Kravis would comment publicly.

For his part, Mr. Mark wouldn't comment on any interest in Gillette, either. But he later paid close attention and scribbled notes to Colgate VP-Investor Relations Bina Thompson during Mr. DeGraan's presentation, taking less interest in presentations by more direct Colgate rivals-Uhlrich Lehner, CEO of German consumer- products giant Henkel and Clayton Daley, senior VP and chief financial officer of P&G.

Yet Mr. Mark, who is also believed to have discussed a merger with Clorox within the past two years, according to two industry observers, said he can keep delivering on earnings growth projections even without a big deal. Mr. Mark said he has made only minor "fill-in" acquisitions during his 17 years heading the company.

"We are very careful in our acquisitions," Mr. Mark said. "People making acquisitions for strategic necessity and critical mass have cost investors an awful lot of money over the past decade. ... We have backed away from acquisitions many times in the past because they were too expensive."

Later, in an interview, Mr. Mark said he would be interested in Bristol-Myers' shampoo and conditioner brands should an acquirer need to spin them off, though he said he had yet to see the prospectus.

Others looking over Clairol include P&G, which at one point proposed but later abandoned the idea of swapping drug brands for the business, and Henkel. Other interested parties include Japanese consumer products giant Kao Corp. and Wella, another German consumer-products company, according to an executive familiar with the situation, who believes that P&G is the favorite to take hair coloring and that Wella is a likely acquirer of the shampoo and conditioner business.

The Clairol deal could rekindle interest from overseas buyers in U.S. brands, and Dial could top the takeout menu for hungry acquirers. Dial Chairman-CEO Herb Baum, who took charge in August with a compensation package heavily based on stock price, has made no secret of his interest in selling the company in whole or part.

"Dial is really the No. 1 candidate [among current independent companies] to be absorbed," said Burt Flickinger, managing director of consulting firm Reach Marketing. "Even if Henkel [which ended most of its joint venture with Dial earlier this month] goes away, Kao and Lion, P&G's major competitors in Japan, could come in."

Kao in particular needs to build mass in the U.S. to complement its Andrew Jergens business, Mr. Flickinger said.

During his presentation at the Goldman Sachs conference, Henkel CEO Mr. Lehner said he feels no pressure to expand globally in laundry detergents or personal care because retail customers and consumer markets aren't truly global yet. Belying his apparent lack of interest, however, Henkel closed deals on laundry detergent brands in Mexico and Russia within a week earlier this month.

Sara Lee Corp., which has so far stayed out of the food industry consolidation wave, was believed by Mr. Shore to have sought a deal with Dial earlier this year. And Mr. Steele believes deals linking food and non-food companies, while out of favor in recent years, could again become popular as major retailers, such as Wal-Mart, increasingly are major players in both areas.

Mr. Baum also has discussed a merger or alliances with similar sized companies, naming Alberto-Culver, Church & Dwight, Playtex Products and Rayovac Corp. as possibilities. In an interview during the Goldman Sachs conference, he said he has been in informal discussions about alliances with two other companies, though he wouldn't name them. But Mr. Baum has acknowledged that egos and culture differences would likely stand in the way of such deals.

Indeed, Playtex Products CEO Michael Gallagher seemed downright offended by the proposition. "He brought up our name in public?" Mr. Gallagher asked. "I think it was inappropriate for him to mention our name."

Church & Dwight President-CEO Robert Davies, who formed a marketing, sales and manufacturing alliance with USA Detergents last year, had no comment on a possible linkup with Dial. Alberto-Culver President-CEO Howard Bernick said, "We have no interest at this time."

A P&G spokesman had no comment on speculation regarding acquisitions, though the company has confirmed it's reviewing the prospectus for Bristol-Myers Squibb's hair care business, as has Henkel. Spokespeople for Sara Lee, Kao and Gillette would not comment on past, current or future discussions regarding mergers or acquisitions. Representatives of Clorox, Rayovac, Wella and Pactiv could not be reached for comment. In a conference call with analysts and investors earlier this month, Playtex Chairman-CEO Michael Gallagher would not comment on whether the company would pursue any of Carter-Wallace's brands. Representatives of Colgate-Palmolive and Clorox would not comment earlier this year on speculation regarding talks between those companies.

Even combined, such companies don't have enough No. 1 brands to "make a really meaningful company against much larger competition," Mr. Flickinger said. But he still expects more companies, big and small, to yield to growing pressure to merge.

"For companies that want to stay independent, there's a lot more pressure to make an acquisition. A lot of the consumer products companies know even the Unilevers and Nestles and Procters don't have enough size and scale when they're talking to [retailers] Costco and [French giant] Carrefour and Wal-Mart," he said. "Any company [with] $5 billion or less [in sales] tends to be less relevant when working with these power-player retailers."

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