On Nov. 13, 2014, Berkshire Hathaway announced plans to acquire the Duracell battery brand from Proctor & Gamble in a complex deal that is expected to save both companies billions of dollars in taxes. The battery maker, one of the biggest on the planet, will be joining a stable of brands that include Heinz ketchup and Dairy Queen ice cream.
Instead of paying for Duracell, Berkshire Hathaway plans to hand back part of the 52 million shares that the conglomerate currently holds in P&G, the world's largest consumer products company. Lauren Coleman-Lochner, Zachary Tracer and Noah Buhayar of Bloomberg peg the value of these shares at $4.7 billion as of November 2014. According to Drew Harwell of the Washington Post, the same stock was worth $336 million in 2013. Had Berkshire Hathaway opted to sell the stock on November 2014, it would have been forced to pay about $1 billion in capital gains taxes, according to Jonathan Stempel and Devika Krishna Kumar of Reuters. Capital gains tax rates were recently raised by 5 percent. Tax savings are not the only benefit of the deal; by adding Duracell to its portfolio, Berkshire Hathaway gains a well-known brand and steady cash flow. These attributes make it a good fit for the Warren Buffet-led company, note Stempel and Kumar.
The Duracell stock deal takes a page from the playbook of two Berkshire Hathaway divestitures that were completed in the first months of 2014. In those deals, the Warren Buffet-led conglomerate exchanged the stock of Phillips 66 for a company that makes chemicals used in pipeline manufacture and used the same method to acquire a Miami TV station and other investments after divesting from Graham Holdings, erstwhile publisher of the Washington Post.
The deal allows P&G to divest from the Duracell battery brand relatively painlessly. However, under the terms of the deal, P&G has to recapitalize Duracell to the tune of $1.8 billion. This will force the consumer products company to take a charge of about $0.28 per share on the last quarter of 2014 and rework its earnings estimates to reflect the company's exit from the battery manufacturing business. P&G has been steadily shedding some of the nearly 200 brands in its portfolio as it works to focus on the 80-odd brands that generate much of the company's revenue.
However, analysts such as Ali Dibadj of Sanford Bernstein see the Duracell divestiture as Warren Buffet's vote of no-confidence in P&G, particularly considering the famed investor held 100 million shares of the company's stock as recently as 2008. This perception led to a slight fall in the share price of P&G during the afternoon trading session on Nov. 13, 2014, the day the Duracell deal was announced. In contrast, Class A Berkshire Hathaway stock rose slightly.
On the same day, the stock of Energizer Holdings, Duracell's biggest competitor hit record highs before falling slightly, causing a net increase of 2.6 percent in the battery manufacturer's stock price. Analysts see this as a sign of investors following Berkshire Hathaway's lead and seeking value in the battery-manufacturing industry. This may signal better days for the industry.
Photo courtesy of supakitmod at FreeDigitalPhotos.net
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