Thursday, August 12, 1999

Purchase of Iams is P&G's biggest

Pet-food maker fetches $2.3B

The Cincinnati Enquirer

        Procter & Gamble raced to the head of the pack of premium pet-food makers, announcing Wednesday a $2.3 billion purchase of the Iams Co. of Dayton, Ohio.

        The acquisition — the largest in P&G's history — will give the Cincinnati household-goods maker a high profile in yet another multibillion dollar, global category.

        It will also help drive the overall sales growth of P&G's premium-priced products, in line with the objectives of its Organization 2005 restructuring plan.

        For the privately held, family-owned Iams, the deal will help the nation's seventh-largest pet-food maker move to the next level with the aid of P&G's vast international distribution network, marketing muscle and deep research-and-development pockets.

        “They (P&G) have resources in parts of the world that we don't have,” Clay Mathile, Iams' chairman and owner, said. “Our vision has been to be the world leader in dog and cat nutrition, and I can't think of a better company than Procter & Gamble to really propel this company to that vision.”

        The purchase agreement, which is subject to U.S. and foreign regulatory approval, calls for P&G to pay $2.05 billion in cash and assume $250 million in debt to take over Iams — founded in 1946 by animal nutritionist Paul Iams.

        Iams, maker of Iams and Eukanuba dog and cat food brands, is the No. 2 seller of premium pet food with about $800 million in worldwide annual sales. The company trails only Hill's Science Diet, made by toothpaste giant Colgate-Palmolive Co, with about $1 billion in worldwide sales.

        Such premium brands are sold mainly at specialty stores and veterinary clinics and represent about 10 percent of the estimated $25 billion global pet food market.

        But Durk Jager, P&G's president and chief executive, made it clear that the Iams acquisition does not mean P&G is jumping into the basic pet-food business.

        “We are really interested in the premium nutrition part of the business and not in what I would call the commodity dog and cat food business,” Mr. Jager said. “We want to build this business on superior technology and branding.”

        And price.

        Premium pet foods can cost 50 cents to 80 cents more per pound than basic brands.

        Iams' sale to P&G took about 60 days to negotiate and is expected to be completed in about 30 days.

        Wall Street's reaction was a yawn, with P&G shares closing Wednesday at $93.25, down 50 cents.

        The acquisition will have no immediate impact on Iams' operations or its 2,100 global employees, both companies said. About 700 Iams employees work at plants in Ohio in Lewisburg and Leipsic.

        Mr. Jager described the Iams purchase as a “building block” in the Cincinnati consumer-products giant's efforts to reach its growth goals under Organization 2005.

        Those goals include 6 percent to 8 percent annual sales growth and earnings growth of 13 percent to 15 percent in each of the next five years.

        In June, Mr. Jager told analysts and investors at a meeting in New York that acquisitions would account for 1 percent to 2 percent of that sales growth.

        “Consistent with Organization 2005 ... Iams will increase annual sales by over 2 percent and will be an important part of the acceleration of our top-line growth,” Mr. Jager said Wednesday.

        Lyle Schonberger, an analyst who follows P&G for Olde Discount Corp. in Detroit, said he was somewhat surprised by the nature of P&G's latest acquisition, but not by the purchase agreement.

        “There are four criteria that go into P&G's business model, and I think Iams fit those four criteria well,” he said.

        According to Mr. Schonberger, P&G looks for four primary characteristics in potential takeover targets: the technological capacity for product innovation; premium products with premium prices; companies that control brand categories; and efficient distribution networks.

        Iams has built a strong international distribution network of its own, selling pet food in 77 countries, with packaging in 20 languages.

        Mr. Schonberger said he expects P&G to continue to acquire such “high-margin, niche businesses with good growth and operations.”

        P&G's Iams purchase promises to benefit consumers as well as the the two companies' bottom lines.

        Michael Ruesy, who follows P&G for A.G. Edwards in St. Louis, said the purchase will probably eventually lead to consumers paying lower prices and having greater access to premium-priced pet foods.

        “While Procter & Gamble has stated that it has no immediate intentions of selling Iams' products through traditional mass and food channels, we think eventually they will expand distribution of Iams to these channels,” Mr. Ruesy said. Then “we would expect Iams' and super-premium pet-food prices in general to move lower.”

        Mr. Jager declined to discuss P&G's distribution plans for the Iams' lines, which are already sold in some top-end supermarkets.

        But he did not rule out the possibility of mass-market distribution.

        “We do think that the brand equity is based on what the consumers think about the brand and not on where it's specifically being distributed now,” he said.

        In addition, Mr. Jager indicated that Iams' brands' potential for market growth could be tied to P&G's existing relationships with mass-market retailers.

        “In many cases, the special pet stores, which aren't that developed outside the U.S., are owned by companies and operations that we do business with in the mass groups,” Mr. Jager said.

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