Remember that Mr. Buffett has agreed to buy the battery manufacturer Duracell, owned by Procter and Gamble (P&G) for $4.7 billion. Prior to closing, P&G will provide US $1.8 billion in liquidity to recapitalize.
In fact, this is more of an exchange transaction. Indeed, Berkshire Hathaway will sell shares of P&G worth US $4.7 billion it has in its portfolio in exchange for Duracell, recapitalized.
On the side of P&G, the transaction is part of its restructuring under which Procter wants to bet only on its most important trademarks. The goal is to sell or divest half of its brands. There is less than a month, management announced that it had therefore decided not to keep Duracell.
On Berkshire side, it adds a company activity in the world, and with a dominant and renowned trade brand. In addition, Mr. Buffett is known for having long been a shareholder in Gillette and P&G then known Duracell (Gillette bought Duracell in 1996 before being acquired by P&G in 2005).
Moreover, at the first glance, the legendary investor does not seem to have paid a heavy price. According to the Wall Street Journal, Duracell revenues would be approximately US $2.2 billion per year, which means that Warren Buffett pays a little more than twice the revenue. If you subtract the cash provided by P&G, you get 1.3 times the income (which is speculative because we do not know the other side of the balance sheet of Duracell).
The other interesting aspect is that Berkshire paid with shares of P&G. The direction of the latter explained that this was done to minimize the tax impact for the company. According to the calculations of P&G, Duracell sells for the equivalent of 9.0 times of its operating profits (EBITDA) based on the cash value and 7.0 times without considering the tax impact. This last figure is significant for Berkshire and on this basis, the purchase seems cheap.
By comparison, P&G sells for about 12 times its operating profits. Clearly, Warren Buffett has demonstrated opportunism to “relieve” P&G’s Duracell.
On June 30, Berkshire Hathaway had 52.8 million shares of P&G. Mr. Buffett has sold 24 million in 2012. If the closing of the transaction was done this morning, Berkshire would sell substantially all of its shares to get their hands on Duracell.
Finally, the transaction is immaterial to the company of Mr. Buffett. We are talking about $2 billion of income, which will increase its annual turnover by about 1%. Still, it adds to his private area without touching its billions in cash society.