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Allan Sloan

In the Acquisition Super Bowl, P&G Scores a TD and SBC Kicks a Field Goal

By Allan Sloan
Tuesday, February 1, 2005; Page E03

Listen up, fans. This is Super Bowl week, prime season for pro football, and it's prime season for corporate takeovers, what with Procter & Gamble buying Gillette and AT&T finally managing to sell itself to SBC, the former Southwestern Bell. These events aren't unrelated.

There's even a stadium involved in each deal: Gillette Stadium in Foxboro, Mass., home of the defending Super Bowl champion New England Patriots, and SBC Park (Pacific Bell Park before SBC bought Pac Bell) in San Francisco. Boys love their toys -- why else are the skies thick with private jets ferrying corporate types to Super Bowl festivities? And having your company's name on a stadium is oh, so macho. As are takeovers.

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The telecom deal's simple: SBC needs business customers, the struggling AT&T has them. End of story. And the end of AT&T as we've known it.

P&G buying Gillette is much more interesting -- there are tax, accounting and shareholder-value issues as well as business issues. And in the middle of the huddle, you find Warren Buffett, chairman of Berkshire Hathaway, Gillette's biggest stockholder.

Buffett, 74, isn't much for on-field athletics -- his best-known sports skill is throwing out the first pitch at the Omaha Royals minor league baseball game the week of Berkshire's annual meeting -- but he's Wall Street's best at going for the big score when the opportunity arises.

Berkshire stands to make a tax-deferred profit of more than $4 billion on this deal -- it has owned 96 million shares of Gillette at a cost of $6.25 a share since 1989, and the deal values Gillette in the $50s. Berkshire, which had agreed with Gillette not to buy additional stock, got a waiver of that agreement on Thursday, and bought 2.98 million shares, more than $150 million worth, on the open market Friday, after the deal was announced. This purchase gave Berkshire a 9.99685 percent stake in Gillette. That's a whisker below the strategic 10 percent level that might force Berkshire to turn over some of its short-term profit to Gillette under the so-called "short-swing profit" rule.

Not only does Berkshire make this nice profit, but Buffett says Berkshire plans to own at least 100 million P&G shares indefinitely. This would give him a low-profile stake of about 3 percent in P&G, rather than his high-profile 9.6 percent stake in Gillette. He says he intends to hold the P&G indefinitely -- but circumstances have been known to change. And a P&G stake of around 3 percent would be far easier to sell than his former Gillette stake.

Before we move to the next level of this deal, a short disclosure timeout. Buffett is a director of The Washington Post Co., which owns my employer, Newsweek; Berkshire and Post Co. own stakes in each other; and I own a significant stake in Berkshire through Newsweek's 401(k) plan.

Back to the game. You might wonder about a baffling move here. First, P&G will issue more than $50 billion of new shares to buy Gillette in an all-stock deal, then will do an $18 billion to $22 billion buyback. It's the equivalent of a 60 percent stock, 40 percent cash deal. Seems inefficient. Why not a straight 60-40 deal for Gillette? In a word: taxes.

A stock-for-stock deal lets the seller defer taxes; by contrast, a cash deal triggers a capital gains bill. Had Berkshire been forced to take 40 percent cash for its Gillette stock, it would have triggered about $700 million of income taxes. But an all-stock-for-all-time deal would put pressure on P&G's per-share earnings. Issuing a ton of stock first and buying back a batch later gives both teams what they want, and gives P&G financial flexibility and a chance to support its stock price. Pretty slick.

In addition, as Lehman Brothers accounting expert Robert Willens explained to me, a 60-40 deal would have required P&G to buy Gillette via a "forward triangular merger" rather than the "reverse triangular merger" that it's using. The difference, Willens says, is that the "forward" transaction could have caused problems with some of Gillette's licenses and contracts, while the "reverse" transaction leaves its current structure intact.

We've looked at the biggest winner here: Berkshire and its shareholders. Another big winner: Gillette chief executive James Kilts, who'll walk off the field with about $150 million. Who are the losers? Gillette's hometown of Boston, where the headquarters operation is sure to be sacked, and the employees in both companies who will lose their jobs.

In its news release announcing the deal, P&G didn't talk about layoffs or even "right-sizing." Instead, it discussed 6,000 "enrollment reductions," which sounds like a school district, not corporate America firing people. Then again, maybe "enrollment reduction" is related to "schooling," which is sports slang for top athletes beating up on inferior competitors.

Finally, there's a grudge match here between the companies in yesterday's deal: SBC and AT&T. A few years ago, when naming rights to the AT&T Pebble Beach Pro-Am golf tournament came up for renewal, AT&T had to top a bid from its former subsidiary. By tee-off next week, however, SBC will have had the last laugh.

Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com.

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