SpinBrush cost P&G a hefty $475 million

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Crest spinbrush gave Procter & Gamble Co. one of its first big oral-care successes in a decade, but P&G paid dearly for the privilege.

A recent filing with the U.S. Securities and Exchange Commission shows P&G spent $475 million for a chance to sell consumers power toothbrushes priced under $6, forking out one of the steepest multiples in industry history.

P&G said it paid an early buyout last quarter of a contingency clause in its January 2001 deal, adding $356 million to the original $119 million purchase price for the product formerly known as Dr. John's SpinBrush.

That meant a big payday for the two Cleveland toy inventors behind Dr. John's, which at the time of the sale had 11 employees, no manufacturing plant or ad spending and a total of $35 million in 2000 retail sales as measured by Information Resources Inc. SpinBrush's cost is equivalent to more than a quarter of the $1.8 billion P&G spent last year on research and development for the entire $39 billion company.

"We're obviously delighted with the acquisition and thrilled that it's the No. 1 power brush in the U.S.," a P&G spokesman said. He said SpinBrush had exceeded even P&G's expectations, and analysts said that performance fueled the steep price.

"It's a humongous price for a branded consumer-products company," said Lloyd Greif, principal with Greif & Co., a Los Angeles investment banking firm specializing in deals involving small and midmarket consumer products companies. The $119 million P&G originally paid was more in line with usual industry multiples, he said. What bumped up the final cost was an "earn out" contingency based on sales.

"That's a smart move for the seller," Mr. Greif said. "And for a company like P&G, with the marketing muscle they have, it can be a very dumb move, particularly if they underestimate the potential of the product."

A bargain?

Earn-out clauses aren't uncommon for deals with "better mousetrap" companies, he said, though buyers often negotiate more restrictive caps. While $475 million may look steep now, he said, P&G could have ended up paying much more in future years if SpinBrush keeps growing as it has.

"What's key here is the ramp-up," he said, "and the ramp-up has been astronomical."

Launched in late 1999, SpinBrush had $4 million in IRI-measured retail sales in the first half of 2000, rising to $30 million by the second half. In announcing the deal, P&G pegged SpinBrush as a $75 million retail business.

Even at that generous retail number, P&G has paid more than six times sales, more than double the multiples it and others in the industry have paid for deals in recent years.

SpinBrush has since reached $200 million in annual sales and expanded to more than 20 countries, P&G said. But the extra $125 million in sales came after P&G restaged SpinBrush under the Crest brand, expanded distribution and spent $17 million on 2001 ad support via Bcom3 Group's D'Arcy Masius Benton & Bowles, New York, according to Taylor Nelson Sofres' CMR.

P&G disclosed the final SpinBrush price May 2, two days after a fiscal third-quarter conference call on which Chief Financial Officer Clayton Daley said P&G wants more deals like SpinBrush but is "trying to take a more disciplined approach" to what it buys and pays.

Jim Gingrich, analyst with Alliance Capital Management's Sanford C. Bernstein, wouldn't describe the SpinBrush price as disciplined, but said shareholders would be happy if P&G made more deals like it. "At the end of the day," he said, "what else matters?"

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