Berkshire Hathaway Inc has agreed to acquire Procter & Gamble Co's Duracell battery unit in a complex transaction that lets Berkshire Chairman Warren Buffett buy a business he has supported for two decades and shave his company's tax bill.
Rather than pay cash, Berkshire (BRKa.N: Quote, Profile, Research, Stock Buzz) will give P&G $4.7 billion of the shares it now owns in the world's largest consumer products company. P&G (PG.N: Quote, Profile, Research, Stock Buzz) will infuse $1.8 billion in cash into Duracell before the expected closing in the second half of 2015.
The transaction announced on Thursday helps P&G Chief Executive A.G. Lafley streamline his Cincinnati-based company by shedding slow-growing brands and focus on about 80 brands that generate most of its profit and revenue. P&G's better-known products include Tide laundry detergent and Pampers diapers.
Buffett, meanwhile, avoids a big tax bill that Omaha, Nebraska-based Berkshire might have incurred if it sold its P&G shares. Both P&G and Berkshire shares hit a record high this week.
Buying Duracell is a "brilliant move," said Doug Kass, who runs Seabreeze Partners Management in Palm Beach, Florida, and is a longtime Berkshire critic who is selling its shares short.
"Warren loves mature and durable consumer brands that produce predictable cash flow. Duracell fits the bill," Kass added. "And accomplishing this in a tax-efficient transaction."
Berkshire has said it paid just $336 million for its 1.9 per cent stake in P&G, equal to 52.8 million shares on June 30.
Assuming a 35 per cent tax rate on corporate capital gains, the swap could save Berkshire more than $1 billion, on top of tax savings from two similar transactions earlier this year.
Berkshire's income tax bill was $8.95 billion in 2013, or 31 per cent of pretax earnings.
NOT A GOOD SIGN
Duracell, whose batteries are known for their copper-coloured tops, gives Buffett a familiar name to add to Berkshire's stable of more than 80 businesses, including Benjamin Moore paint, the Dairy Queen ice cream chain and Heinz ketchup.
"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. [ID:nBw5J6R8za]
Some analysts questioned why Berkshire views Duracell as a good fit, while P&G does not.
While Duracell has more than one-fourth of the global market for batteries, demand has slackened amid the growth in smartphones and other devices that rely on rechargeable power sources.
"It is a good thing that P&G is moving swiftly to divest its non-core brands," Sanford Bernstein analyst Ali Dibadj said. "I don't take it as a good sign that Buffett would rather own Duracell than P&G."
Buffett's assistant did not immediately respond to a request for further comment.
In afternoon trading, Berkshire's Class A shares were up 0.4 per cent at $218,912, while P&G fell 0.7 per cent to $88.87.