P&G's $7 bil bid for Wella seen as wise

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Even as P&G proposes to acquire Germany's mainly overseas Wella hair-care and fragrance business for $7 billion, the company continues to struggle with U.S. declines in Clairol brands it acquired 16 months ago.

Both analysts and P&G, however, view $3.7 billion Wella as considerably healthier than the $1.6 billion Clairol business P&G bought in November 2001. Wella, with its strong presence in European professional hair care, could even help the Clairol hair-color business, which one executive close to P&G said "had nothing in the new-product pipeline" when it was bought.

P&G hair-color sales fell 16.5% in the four weeks ended Feb. 23, according to market share figures from VNU's ACNielsen Corp. reported by Banc of America Securities. That was the worst showing in 15 consecutive months of share declines since P&G bought Clairol.

bright spot

Former Clairol brands also lost dollar share in shampoo, conditioner, gels and mousses, though they gained in hairspray, in the 52 weeks ended Feb. 23, according to Information Resources Inc. A bright spot, however, is the younger-skewing Herbal Essences, with sales up 3.7% to $266 million in a flat $4.3 billion hair-products market.

In an investor conference announcing the Wella deal last week, Chairman-CEO A.G. Lafley said that P&G has an uphill battle turning around Clairol hair color. "Bristol-Myers Squibb had frankly milked the heck out of this business for a number of years, so the asset we picked up we had to breathe a fair amount of life into," he said. "Wella ... is a company that's been growing most of its segments and most of its brands at a fairly good clip. ... So we expect to at least sustain that 6% growth rate."

Besides pushing P&G past L'Oreal as overall global leader in hair care, Wella's $860 million fine-fragrance business makes P&G a much bigger player in prestige beauty. The enlarged fragrance business could become a distribution platform that lets P&G extend its pricey $400 million SK-II skin-care brand, now sold only in Asia and the U.K., more broadly in Europe, or even the U.S., said Andrew Shore, analyst with Deutsche Bank. SK-II, whose loyalists spend up to $10,000 a year on the brand, has been growing at a 16% annual clip in recent years, Mr. Lafley said.

With nearly half its sales in professional beauty care, Wella isn't a big consumer advertiser now. It spent only $38 million on ads last year in Germany, its biggest market. Select, Frankfurt, creates ads for Wella, which are adapted and placed globally by Cordiant Communications' Bates Worldwide, which stands to lose one of its few remaining international accounts.

"It's too soon to talk about future plans," a P&G spokeswoman said of possible ad assignments, but P&G's existing beauty-care shops, Grey Global Group and Publicis Groupe's Saatchi & Saatchi, Leo Burnett Co., Beacon and Kaplan Thaler Group, are leading candidates to land assignments.

The fate of Wella's retail brands may not be sealed. With a nearly 7% stake, Germany's Henkel can stop P&G from delisting Wella as a public company under German law.

contributing: dagmar mussey

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