Less than a week after delivering a lower quarterly profit because of a write-down of its stake in the UK retailer, Tesco, Warren Buffett’s Berkshire Hathaway has surprised with the $US4.7 billion buy of Duracell batteries from consumer products giant, Procter and Gamble.
It’s a further move by Buffett into consumer products with high brand recognition, and it was a very neat deal indeed with Berkshire Hathaway doing it with no cash outlay, and got the vendor to inject nearly $US2 billion into Duracell.
Duracell is recognised around the world for its distinctive black and gold design and it was put on the market last month by P&G which said it wanted to reduce its focus to a small group of super brands.
Berkshire is the fifth-biggest shareholder in P&G, but it will swap its stake for ownership of Duracell plus $US1.8 billion in cash that P&G will inject into the subsidiary before the deal closes.
The deal is the third time in a year that Mr Buffett has swapped shares from his investment portfolio for full ownership of an operating business.
He has previously traded a stake in Graham Holdings, the former owner of the Washington Post, for a TV station in Florida, and shares in Phillips 66 for a subsidiary of the energy company.
The share exchange, after P&G recapitalises Duracell will let P.&G. and Berkshire Hathaway avoid significant taxes on the deal.
Mr. Buffett became a big shareholder in P&G through the Gillette takeover, since Berkshire Hathaway owned 9% percent of the razor maker. He also sat on Gillette’s board. The stake has been slowly reduced, but it was still substantial at the time of this deal.
Berkshire has bought into some of the biggest brands in the world, including Coca-Cola, IBM and American Express. Last year it backed the $US28 billion acquisition of food group, Heinz, in partnership with private equity firm 3G Capital. It owns outright the well known US clothing group, Fruit of the Loom and controls See’s Candy, another well known US brand.
“I have always been impressed by Duracell, as a consumer and as a long-term investor in P.&G. and Gillette,” Mr. Buffett said in a statement. “Duracell is a leading global brand with top quality products, and it will fit well within Berkshire Hathaway.”
As part of narrowing its focus, P&G has sold at least 10 businesses this year, according to Standard & Poor’s Capital IQ, including the Iams pet food brand for $US2.9 billion in cash. The Duracell move though because of the share swap means the company hasn’t gained as much cash as it would see.
Mr. Buffett will become the latest owner for Duracell, which has passed through several companies in its 50 years. Others to have controlled Duracell include Kraft, the private equity group, KKR and Gillette, which paid $US7 billion for the business in 1996. P&G bought it when it snaffled Gillette for $US57 billion in 2005.
That means it has either fallen in value of Gillette overpaid considerably in 1996. But what the deal does mean is that Berkshire Hathaway will remain a long term owner of Duracell of the kind it hasn’t had in its 50 year life.
