Duracell: Warren Buffett's Latest Acquisition for Berkshire

Procter and Gamble (PG) has decided to shed its battery business and sell it to Warren Buffett’s Berkshire Hathaway (BRK-B). The transaction will be conducted by PG obtaining shares from Buffett’s current stake in PG and the deal is expected to close in the second half of 2015.

PG is currently down about .20% and is trading at $89.30 per share. BRK-B is currently up .40% in today’s news trading at $146.10 per share.

Berkshire currently owns $4.7 billion worth of PG stock. At the close of the deal, PG will capitalize Duracell with $1.7 billion in cash which would value the battery maker at about $3 billion. The deal is expected to close in the second half of 2015. Since Berkshire will be giving back shares to PG, the structured deal allows Buffett to monetize his stake in PG without incurring the tax expenses of selling the shares back to the market first.

P&G said the transaction maximizes the after-tax value of the Duracell business and is tax efficient for P&G. The value received for Duracell in the exchange is approximately 7-times fiscal year 2014 adjusted EBITDA. This equates to a cash sale valued at approximately 9-times adjusted EBITDA.

“I have always been impressed by Duracell, as a consumer and as a long-term investor in P&G and Gillette,” Buffett said in a statement. “Duracell is a leading global brand with top quality products, and it will fit well within Berkshire Hathaway.”

Well Known Companies

Berkshire has stakes in a variety of well known consumer brands like See’s Candy, Dairy Queen, Fruit of the Loom, and Benjamin Moore, as well as Heinz (though this is alongside the Brazilian private equity firm 3G). Earlier this year, Buffett also helped finance Burger King’s proposed buyout of Tim Horton’s. Burger King is majority-owned by 3G and the joint company will be overseen by 3G executives.

Duracell is the pioneer in premium battery segments and currently upgraded one of their battery brands will last 180 minutes longer than a regular alkaline battery in a high-drain toy and give 150 more pictures in a flash camera. The product will also sell for about a 20 to 25 percent premium to regular Duracell batteries.

Market share in the U.S of leading alkaline batteries from 09’-12’ was Duracell having a plurality of market share every year ranging from 38%-40% of the total battery market. Duracell boasts more than 25% of the worldwide battery market

Quarterly Earnings

The announcement in late October came as PG reported its first quarter results, which took a hit as PG wrote down Duracell assets. PG reported a $2 billion profit for its quarter ended Sept. 30 – down 34% from the same period a year ago. But accounting was to blame as the company recorded a $932 million non-cash charge as PG wrote down Duracell's goodwill and intangible assets.

Earnings were $1.07 per share, meeting analyst expectations, while the company's flat $20.8 billion in sales were better than a 0.8% decline anticipated by analysts.

The Company expects to restate earnings per share of approximately $0.12 to $0.14 to discontinued operations for fiscal year 2014. All-in GAAP earnings per share are not affected by the restatements.
P&G said it will incur a non-core, non-cash charge of approximately $0.28 per share in current quarter results to adjust Duracell goodwill and intangible assets to the expected after-tax transaction value.



FY15 Outlook

PG noted that earnings per share estimates for fiscal year 2015 should be calculated based on restated 2014 core EPS range of $4.08 to $4.10, which includes the exit of Duracell.

All-in GAAP diluted net earnings per share are now expected to be down 12% percent to down 15% percent versus the prior year, including approximately $0.83 per share of non-core charges, primarily from $0.20 per share of non-core restructuring charges and $0.60 of impairment charges.

Justification

The investment in Duracell is a typical Buffett type investment in that everybody knows what Duracell actually does and is familiar with its products. From the consumer brands that I listed previously, investments from Warren Buffett are not too difficult to wrap your mind around.

When a company has customer loyalty and trust, Buffett treats it like a long-term high demand, low supply commodity. In the case of Procter & Gamble, that competitive advantage comes in the familiarity of some of its biggest brand names. Among them are: Gillette razors, Pampers diapers, Crest toothpaste, Duracell batteries, and Head & Shoulders shampoo and conditioner.

Trust and customer familiarity is one of the biggest attributes that Buffett looks for in an investment. When you know and trust a certain brand, you are usually willing to pay a little extra as compared to generics. That pricing power is huge, and is able to keep the competition at bay, all the while raking in more profits.

Bottom Line

We currently rank BRK-B as a Zacks Rank #2 (buy) and we currently rank PG as a Zacks Rank #4(sell). This current acquisition definitely adds another trustworthy company that customers have learned to trust to Warren Buffett’s portfolio. Investors should be thinking about why PG decided to sell Duracell and not to keep as an investment. Did they have an intuition that the battery segment would not prosper in the future, or did they need to raise capital in a hurry? Or did they view this Buffett deal as a great way to get rid of the segment in a tax-favorable way?

Investors need to be asking this in order to obtain the perspective from every angle possible. Investors should be on the lookout how this acquisition plays out in the future and see how Warren implements new strategies to grow Duracell into a bigger global authority in the battery sector.

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