P&G Purchase of Gillette Continues Merger Mania

The Oracle of Omaha has to be very happy today. His holding company, Berkshire Hathaway, owns a 9 percent stake in Gillette (G), a stock that rose $6 today on word that consumer products giant Procter and Gamble (PG) will buy the company for about $11 billion in stock.

Fortunately for Mr. Buffett, he is on the receiving end of this deal. While he is publicly raving about the prospects for the combined P&G/Gillette, it is fairly obvious that this is not the kind of purchase Buffett himself would ever make. Procter is paying a whopping 28 times forward earnings for Gillette. With P&G shares fetching about 20 times earnings, this merger is extremely dilutive. Analysts estimate earnings per share will drop 15 to 30 cents in the upcoming fiscal year, as much as a 10 percent dilutive effect.

Company executives will clearly try and mask the dilution by praising its plan to buy back billions of dollars in stock, but that doesn’t change the fact that P&G paid 28 times for a mature, slow growth, cash cow business. Sure there will be some synergies, but like with most deals, they will be overstated from the outset. It will be very interesting to see how well P&G stock does for Buffett and Co. over the next 5 or 10 years. I suspect despite all of the rave reviews presented today, actual stock price appreciation long term won’t be all that impressive, given current valuations.