NEW YORK (CNN/Money) -
Procter & Gamble's $7 billion acquisition of German hair care firm Wella on Tuesday is perhaps a clear signal that the company's new mission is to champion shampoo and hair color over detergent and diapers.
Analysts said it's not surprising that the maker of such consumer products as Tide detergent, Crest toothpaste and Pampers diapers is keen on strengthening its health and beauty business.
The global market for hair care products reached sales of $27 billion in 2001, with North and South America the biggest markets, accounting for 40 percent of the total, according to market analysis firm Datamonitor.
"Beauty care is a fast-growing market that delivers higher-margin returns than cleaning products," said Joseph Altobello, retail analyst with CIBC World Markets. "Personal care products help to grow the top and bottom line."
According to Andrew McQuilling, retail analyst with UBS Warburg, Procter & Gamble's pre-tax margin of 23 percent from its beauty care business in 2002 helped to boost the company's overall corporate profit margin to 19 percent.
"Procter & Gamble is continuing to build a bigger personal care business. The Clairol acquisition made it the global leader in the consumer hair care market over L'Oreal," Quilling said. "The Wella buy solidifies its global lead with 21 percent of the market versus 15 percent for L'Oreal."
P&G bought the Clairol hair care business from Bristol-Myers Squibb for $4.95 billion in 2001, adding it to its Head & Shoulders and Pantene brands.
Wella for $7B
Industry watchers said by topping the German company Henkel's bid for Wella, P&G gained a strategic boost in the European market, where Wella is the No. 2 brand after L'Oreal, a French firm.
L'Oreal continues to dominate the global market for hair care products used by professionals, such as beauticians and barbers.
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"With the successful acquisition of Wella, P&G also would now have renewed focus on mass market hair care and be able to use its size and advertising muscle to put the pressure on," said Sandya Raju, analyst with Merrill Lynch in London.
UBS Warburg's McQuilling added, "Wella has a strong market in Western Europe. The company's been dong well with 9 percent growth over the past 3 or 4 years and 6 percent organic growth."
P&G (PG: up $1.20 to $86.70, Research, Estimates), whose interest in buying Wella was first reported a month ago, said it had reached agreement with the German company's family owners to buy their majority stake and will launch an offer to remaining shareholders.
The company said it will offer 92.25 for each of Wella's 44.1 million common shares and 61.50 for its 23.38 million non-voting preference shares, valuing the bid at 5.4 billion. P&G will also take on Wella's 1.1 billion in debt.
But Wella's fiercely independent management responded coolly to Tuesday's announcement, saying the company would be better off alone.
"From a business perspective the announced transaction is not a necessary step," Wella said, adding it respected the family owners' decision to sell.
Analysts say that although the hair care industry looks ripe for more consolidation, the profitability of the business, even for the smaller players, makes more buyouts unlikely in the near future.
Said McQuilling, "There are basically just three big players -- L'Oreal, Procter & Gamble and Unilever (UN: up $0.11 to $57.01, Research, Estimates). It's a question of availability of companies that want to sell. Even the Wella acquisition was six years in the making."
--Reuters contributed to this report
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