Procter & Gamble to buy Iams, pet food maker, for $2.3 billion

Premium line added to accelerate growth via diversification


Procter & Gamble Co. is expanding its mix of top-selling brands by acquiring Iams Co., the premium pet food maker, for $2.3 billion, the company said yesterday.

The deal, Procter & Gamble's largest acquisition in dollar terms, moves the maker of Tide detergent and Crest toothpaste into a market-leading position in the high end of the $25 billion pet food market. And it is a major first step in the company's strategy to speed growth by diversifying beyond household cleaning products, health and beauty aids and its other traditional categories.

The acquisition combines the pet food maker's premium Iams and Eukanuba brands of dog and cat food, and its expertise in pet nutrition, with Procter & Gamble's global infrastructure and manufacturing efficiency.

In addition to increasing Iams' international business, which represents about 30 percent of revenue, P&G said it would extend to pet products its scientific expertise in such areas as skin and hair care, dental hygiene and bone and tooth health.

That is not to say there will soon be a Crest for canines or a conditioner for tackling fur balls. But the purchase of Iams, which includes the assumption of $250 million in debt and is subject to regulatory approval, "will be an important contributor to accelerating our growth," said Durk I. Jager, president and chief executive officer of Procter & Gamble. "It fits well with P&G's strengths, including expertise in health and nutrition."

Iams, based in Dayton, Ohio, has annual revenue of about $800 million and has been growing on average by 16 percent for the past four years. Iams is the second-leading brand behind a familiar P&G rival -- Colgate-Palmolive Co., which makes Colgate toothpaste and owns Hill's Pet Nutrition products. Each company's pet food is sold in specialty stores, pet supply shops and veterinary clinics.

"It's going to be tougher out there," said Robert Izmirlian, an analyst with S&P Equity Group. "Nobody's looking to cut prices, but it's certainly going to be more challenging from a product-introduction standpoint and an advertising standpoint."

Clay Mathile, chairman and owner of Iams, called the sale to P&G a "growth opportunity for our products and people."

Procter & Gamble's last major acquisition was its purchase in 1997 of Tambrands Inc. for $2 billion. The company, which has experienced weakness in some foreign markets and a need for bigger successes from new products, has said it expects to increase long-term annual sales to 6 percent to 8 percent from 2 percent and that most of the growth would come from internal innovation instead of acquisitions.

"Procter is a collection of premium brands, and Iams is a premium brand in a category that's got global applications to it," said William Steele of Banc of America Securities.

Investors were neutral on the transaction, likely because it will not contribute to earnings for three years. P&G shares closed at $93.025, up 50 cents.

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