P&G Taps New $17 Billion Market
For Household Tap Water Filters

By Marguerite Nugent  

CLEVELAND — First it was premium pet care, now it's purified drinking water.

For the second time this month consumer products giant Procter & Gamble Co. has taken a step in a new direction, with news Wednesday of a $265 million acquisition of Recovery Engineering Inc.

The acquisition of the Minneapolis-based maker of household drinking water systems and filters gives Procter & Gamble entry into a $1.2 billion global market, much of which the company believes is virtually untapped.

"Recovery Engineering is in the forefront of the fast-growing market for home water filtration systems," said Durk Jager, president and chief executive of P&G.

"Their superior technologies provide a terrific opportunity for P&G to improve the lives of the world's consumers," he added.

P&G is offering $35.25 a share— or double Recovery's share price— in the tender offer it plans to launch within the next five days.

Recovery's stock caught up with the offer, jumping over $17 to a high of $35.25 before easing to $34.75 in Nasdaq trading. 8 P&G's stock, which is a component of the Dow Jones Industrial Average, dropped $2.50 to $100.125 on the New York Stock Exchange.

Donald Tassone, a spokesman for P&G, said the deal will reduce Procter & Gamble's earnings in fiscal 2000 and 2001 by less than a penny a share in each year. "That is already covered in our current guidance (to Wall Street)," he said.

In July, P&G said it expected earnings at the low end of a 13 percent to 15 percent growth range. It earned $2.59 a share in the fiscal year ended June 30, 1999.

In June, Jager said the Cincinnati-based P&G, maker of such classics as Tide detergent and Crest toothpaste, would be looking for new ways to grow its business beyond its current seven business units, as part of a massive reorganization to make P&G more competitive and more profitable.

On August 11, it entered the lucrative pet care market with a $2.05 billion acquisition of privately-held premium pet food maker Iams Co., the largest acquisition in its history.

Tassone said the price tag for Recovery was justified because it is a strong and growing business, has developed excellent technology and, key for P&G, offers potential for global growth.

"This is a $1.2 billion business, about half of which is in the U.S., and we believe it could be in the mid-teens over the next decade." he said, meaning the industry might reach annual sales of some $15-17 billion.

He said the market has been growing at an annual rate of 40 percent a year for the past five years, but the market outside the U.S. is "virtually untapped." he noted.

He said Recovery, which markets systems under the PUR brand, has about 37 percent of the U.S. market for water filtration systems compared with 15 percent in 1996.

The water-treatment market has heated up recently, with French conglomerate Vivendi SA agreeing to buy U.S. Filter Corp., the No. 1 U.S. water-treatment company, for $6.2 billion in March. The No. 2 U.S. player, United Water Resources Inc., agreed in August to be sold for $1 billion to Suez Lyonnaise des Eaux, also of France. The larger water-treatment companies such as US Filter and United Water include, besides consumer products, extensive operations in commercial and municipal contracting. Recovery Engineering, though, makes products exclusively for the consumer market.