Berkshire Hathaway to buy Duracell battery business

January 2015 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

Private equity giant Berkshire Hathaway Inc announced in mid-November that it had agreed to acquire the Duracell battery business of Procter & Gamble (P&G) in a complex deal worth approximately $4.7bn.

Under the terms of the agreement, rather than paying cash for the unit Berkshire will fund the purchase using $4.7bn worth of shares that the firm owns in P&G. The price Berkshire will be paying for the brand is about seven times the company’s earnings before interest, taxes, depreciation and amortisation, or nine times Duracell’s cash sale value. According to a statement announcing the deal, P&G will be required to recapitalise the Duracell unit with a cash injection of around $1.8bn before the transaction closes. The deal is expected to close in the second half of 2015, subject to regulatory approval and customary closing conditions. By completing the deal in this manner, Berkshire is able to avoid a potentially large tax bill which would have been payable had the firm sold its shares in P&D directly.

The way that the deal for Duracell has been structured means that Berkshire will essentially cash out its entire holding in the P&G business. Berkshire had previously been the company’s fifth largest shareholder. “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’s chief executive. “Duracell is a leading global brand with top quality products, and it will fit well within Berkshire Hathaway.”

For Berkshire, the deal to acquire the Duracell business was a short time in the making. P&G only announced that it was spinning off the business on 24 October, as part of an effort to trim the number of brands the firm offers. Berkshire’s acquisition of the business was confirmed just a few weeks later.

Once the company has completed its divestitures, P&G intends to focus on a core group of 80 or so brands, those which generate the majority of the company’s revenue and profit. P&G has demonstrated in its divestitures that it is not afraid to divest high profile businesses. Prior to the agreed Duracell sale in September 2014, P&G agreed a deal to sell a number of its pet food units, including the Iams and Eukanuba dog and cat food brands to Spectrum Brands Holdings Inc. The firm is believed to be close to securing deals to sell another 10 of its brands.

Despite P&G’s decision to divest the business, Duracell is still the world’s leading battery manufacturer, posting annual sales of around $2.2bn. Regardless, sales of Duracell’s products and those of the firm’s closest rival Energizer Holdings have both been adversely affected by the increasing popularity of rechargeable batteries. As consumer electronics have become more popular in recent years, rechargeable batteries have become far more prevalent. Accordingly, Energizer is also in the process of spinning off its battery manufacturing business.

P&G, the world’s largest consumer products company, will take a non-cash charge of 28 cents per share to write down goodwill and intangible assets related to the Duracell business. The firm will also be required to adjust its fiscal 2014 results to reflect Duracell as a discontinued operation. “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, P&G chief executive. “I’m confident this new ownership structure will provide strong support for Duracell’s future growth plans.” P&G had acquired the Duracell business in 2005 as part of the company’s $57bn acquisition of Gillette. Mr Buffet had been an investor in the Gillette business since 1989.

The stock swap deal for Duracell is becoming a trademark transaction for Berkshire. In recent years the firm has completed similar deals for chemical manufacturer Phillips 66 and a Miami television station. Should Berkshire wish to complete any further acquisitions, the company has the financial means in place, ending September 2014 with around $62bn in cash.

Richard Summerfield