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Gillette Seeks to Energize Its Business With Duracell Deal

Acquisitions: Razor maker agrees to buy battery leader in $7.1-billion move that would merge consumer-products giants.


Gillette Co., moving to seize the top spot in the consumer battery market, agreed Thursday to buy Duracell International Inc. in a stock deal valued at $7.1 billion.

The purchase would meld two names instantly recognized by consumers around the world: Gillette, the global leader in shaving razors and blades, and Duracell, the world's biggest maker of the alkaline batteries used in electronics gear, toys and flashlights.

For Boston-based Gillette, the Duracell deal would enable the company to reduce its reliance on shaving products and expand its own consumer-products family, which already includes Right Guard and Foamy toiletries, Parker pens and Oral-B toothbrushes.

Gillette's shaving gear, which includes the Sensor, Good News and Trac II razor brands, currently accounts for nearly 40% of its sales.

"This is not a diversification, but an additional leg to our tightly focused, technologically driven consumer-products business," Gillette Chairman Alfred M. Zeien said in announcing the merger, which is subject to approval by both companies' shareholders.

Analysts also noted that Duracell runs a business with which Gillette is intimately familiar--selling items that are in constant demand because they need to be frequently replaced.

Duracell, based in Bethel, Conn., would in turn get to exploit the massive advertising and distribution muscle that Gillette has in markets worldwide. Indeed, foreign sales account for 70% of Gillette's business and its prowess overseas could help Duracell widen its lead in the battery market over its closest rival, the Eveready/Energizer subsidiary of Ralston Purina Co.

Wall Street also cheered the deal, which is priced 20% above what had been Duracell's market value Wednesday of $5.8 billion. Duracell's stock soared $9 a share, to $58.125, in New York Stock Exchange composite trading Thursday.

Even Gillette's stock rose. A buyer's stock typically falls after such an announcement, because of costs related to merging the operations. But Gillette gained 87.5 cents, to $66 a share, signaling that investors expect Duracell to immediately add to Gillette's profit.

The deal calls for Gillette to exchange 0.904 share of its stock for each Duracell share. If the deal goes through, the merged company would keep the Gillette name.

And one investor group is especially happy: the famed buyout specialist Kohlberg Kravis Roberts & Co., which with its investors holds a 34% stake in Duracell and once owned the company outright after buying it from Kraft Inc. for $1.8 billion in 1988.

KKR invested $350 million when it acquired Duracell and since then has already earned profit of $850 million by selling pieces of Duracell to the public. With the Gillette deal, KKR's overall profit--on paper at least--would reach $3 billion, or nine times its original investment.

To be sure, Gillette is jumping into an intensely competitive battery market, as a stroll through any grocery store can attest. If it buys Duracell--which had $2.3 billion in sales in its fiscal year ended June 30--consumers can expect Gillette to aggressively seek ways to better market its copper-and-black batteries, analysts said.

But that effort will stop short of slashing prices to make Duracell stand out, they said.

"Gillette doesn't cut prices," said R. Scott Graham of Oppenheimer & Co. in New York. "Look for it to come in with better merchandising" to generate more "impulse buys" by shoppers, he said.

Although 95-year-old Gillette is renowned for having dominated the shaving market for decades, the company has been particularly stout in recent years.

In response, Gillette's stock has soared sixfold since 1990--including a 20% gain so far this year, or double the increase in the Standard & Poor's 500 index--and the rich stock gave Gillette the currency to buy Duracell.

With sales last year of $6.8 billion, Gillette's growth has been powered in good part by its higher-priced, non-disposable Sensor razors, which came out in 1989 after years of research and millions of dollars of development spending.

The Sensor and its newer brother, Sensor Excel, not only curbed the rapid growth of cheap disposable razors, they also demonstrated Gillette's ability to persuade consumers to spend more for a commodity item that they perceive as superior. And Gillette will try the same tack with batteries, analysts predicted.

Duracell, despite maintaining its lead in the battery market, has grown more slowly and its stock has lagged the overall market for two years. Part of the reason is Duracell's heavy investment in its new PowerCheck batteries, which enable users to visually check the battery's remaining power at any time.

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