In a deal powered by tax savings — oh, and Warren Buffett’s belief in the untapped value of an enduring brand — Berkshire Hathaway is taking another nonessential product off the hands of Procter & Gamble by handing back 52.5 million shares — worth about $4.7 billion — it currently holds in the company. But, in a maneuver that makes accountants accountants, P&G is about investing $1.7 billion in Duracell as part of the deal, reducing Berkshire’s cost to about $3 billion.
“Known as a ‘cash-rich split-off,’” Michael de la Merced tells us in the New York Times, the overall maneuver “falls within guidelines set by the Internal Revenue Service that allow for corporate businesses to be sold using stock without taking a big tax hit.”
“Had Berkshire sold its P&G stake in the open market, it would have to pay huge taxes on gains from the sale,” explains the Wall Street Journal’s Anupreeta Das. And, given that P&G had inherited Duracell as part of its purchase of Gillette in 2005, it, too, “would have to pay big taxes on any proceeds from the sale of the unit” because of a low cost basis, Das points out.
Barron’s Andrew Bary estimates “Berkshire likely would have faced about $1.5 billion in taxes from an outright sale of its P&G stake.”
It was that 1995 $57-billion Gillette deal that gave Berkshire a stake in P&G to begin with as Buffett’s 1989 investment of $600 million in the razor blade company had ballooned to about a $4.4 billion stake by the time of the transaction, as CNN/Money reported at the time.
“I have always been impressed by Duracell, as a consumer and as a long-term investor in P&G and Gillette,” Buffett said yesterday in the release announcing the deal. “Duracell is a leading global brand with top quality products, and it will fit well within Berkshire Hathaway.”
Speaking to Fox Business Network, Buffett said: “This is our kind of business. … Not very exciting but a good, solid business. I’m a Duracell guy. Always have been,” USA Today’s Adam Shell reports.
“Our kind of business” is the kind of brand that just keeps powering on, from Heinz ketchup to Benjamin Moore paints.
“We don't disclose brand level profits, but it's a very profitable business,” P&G CFO Jon Moeller said of Duracell in a conference call with reporters, Barrett J. Brunsman recounts in the Cincinnati Business Courier. “This is the leading brand in the category. It's the branding and innovation leader.”
The deal advances P&G CEO A.G. Lafley’s plans to divest the company of up to 100 brands — “many of which he’d acquired and developed,” as Michael Schrage pointed out in the Harvard Business Review in August. It’s “part of a strategy to dramatically improve P&G’s financial performance by doubling down on the roughly 80 brands that generate 95% of the company’s profits and 90% of its sales.”
Indeed, “Moeller told analysts at company headquarters this morning that the Duracell sale meets the company's goal of maximizing shareholder value and minimizing share dilution,” reports the Associated Press’ Dan Monk.
"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,” write Reuters’ Jonathan Stempel and Devika Krishna Kumar.
“It is a good thing that P&G is moving swiftly to divest its non-core brands. I don't take it as a good sign that Buffett would rather own Duracell than P&G,” quipped Sanford Bernstein analyst Ali Dibadj in their story.
“Granted, volumes are down [in the battery industry], but Buffett is still buying an entity that has additional room for improvement, and he is buying it at a discount,” S&P Capital IQ analyst Cathy Seifert tells MarketWatch’s Sital Patel.
“Buffett is a value investor, and it is not the first time he has gone into an industry where the macro trends have been softening,” said Seifert. “He will go in, cut costs, tweak margins and amp up distribution.”
“P&G is not getting bigger by getting smaller; it’s redefining the measures and metrics it will use to invest in value creation,” Schrage concludes in his HBR piece cited above. “Lafley 2.0 is a multibillion-dollar bet that the most important way to change the game is changing how you’re going to keep score.”
Speaking of Big Data — who isn’t? — it is beginning to look like marketers will have to become more adept not only in their comprehension of measures and metrics and the like, but also in their understanding of financial jargon like “cash-rich split-offs.” They will need to “speak money,” in other words. Of course, they have a book for that.