Procter & Gamble (PG, Financial) is one of the largest and among the fastest-growing consumer goods companies across the world with its presence felt in more than 180 countries. The company deals in consumer-packaged goods. Across the world, PG serves around 4.8 billion people. The company operates in five segments – Health Care, Beauty, Family Care, Grooming and Home Care.
In a recent announcement, Berkshire Hathaway (BRK.B, Financial) said that it is going to acquire Duracell of Procter and Gamble. PG was not quite happy with its Duracell business and was for quite some time now wanted to get over with Duracell.
Summary of the deal
Following its prior announcement of plans to exit the Duracell business, P&G said it now plans to execute a split transaction, in which it will exchange a recapitalized Duracell Company for Berkshire Hathaway’s shares of P&G stock.
“We thank the Duracell employees for their many contributions to the business. They’ve made Duracell the global market leader in the battery category,” said A.G. Lafley, CEO of PG. “I’m confident this new ownership structure will provide strong support for Duracell’s future growth plans.”
"I have always been impressed by Duracell, as a consumer and as a long-term investor in P&G and Gillette," commented Warren Buffett, Berkshire Hathaway chief executive officer. "Duracell is a leading global brand with top quality products, and it will fit well within Berkshire Hathaway."
Berkshire’s stock ownership is currently valued at approximately $4.7 billion. P&G said it expects to contribute approximately $1.8 billion in cash to the Duracell Company in the pre-transaction recapitalization. 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 seven times fiscal year 2014 adjusted EBITDA. This equates to a cash sale valued at approximately nine times adjusted EBITDA.
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. P&G expects to finalize the restatement and one-time charge amounts in the next few weeks, and will update shareholders when final amounts are available. P&G said it expects to close the Duracell transaction in the second half of calendar year 2015 pending necessary regulatory approvals. (Source: Company’s Website)
What this deal means
Following the deal, PG will be able to get rid of its slow-paced brands and focus effectively on its remaining 80 other brands. The not-so-good sign of this deal is that consumers across the world are moving towards rechargeable batteries. For PG it is definitely a very good move since it was for quite sometime that the battery business was deteriorating in volume and the company was not quite really benefiting from synergy effects of its businesses. PG will be able to concentrate on its more profit contributing businesses. PG was eager to split off Duracell since 2007.
This deal may contribute to expand Berkshire Hathaway’s earnings since the taxes to be paid are quite low. Berkshire has a diversified range of businesses in its kitty- building, construction, railroads, insurance, to name a few. Acquisition of Duracell will add to these diversified businesses of Berkshire Hathaway. Berkshire Hathaway remains amongst the top investors of PG. According to Morningstar Data, BRK holds around 52.8 million in shares in PG.
Warren Buffett (Trades, Portfolio) said, "Duracell is a leading global brand with top quality products, and it will fit well within Berkshire Hathaway."
As per the experts, Duracell still has to be used for TV remotes and toys. It has plenty of room to grow if it can expand into rechargeable batteries. Duracell is already into developing lithium-ion batteries. Berkshire Hathaway may benefit from innovations that it may put in for Duracell.
Duracell commands over 25% of the global battery market. Duracell has been meeting the power needs of people around the world for more than 40 years. Duracell is the world’s leading manufacturer of high-performance alkaline batteries. I think that Berkshire Hathaway will benefit from the Duracell acquisition.
