Tax, brand and product. That is the order of priority which likely saw Warren Buffet's holding company Berkshre Hathaway purchase battery company Duracell from Proctor & Gamble last month.
Prior to the Duracell purchase announcement in November, Berkshire Hathaway held close to 57 million shares in Proctor and Gamble worth $4.7bn.
An arrangement was developed that Proctor & Gamble would sell its battery manufacturer Duracell in exchange for Berkshire’s P&G shares.
By exchanging P&G stock for the entirety of Duracell, Berkshire was able to abstain from paying any capital gains taxes which would have occurred if the P&G shares had been sold for cash.
According to Time.com, the P&G stake stood on Berkshire’s books at the beginning of 2014 with a cost basis of just $336m, less than 10% of its value. Therefore the tax savings alone were a compelling value proposition for Berkshire Hathaway and its shareholders.
Furthermore, according to Interbrand, Duracell’s brand value in 2014 was valued at $4.9bn. So in essence, Buffett paid less for Duracell than the companies brand value alone is worth.
But of course, Duracell’s business is batteries and it excels in its marketplace with P&G stating in its annual report that Duracell has maintained in excess of 25% of the global battery market share.
Needless to say, the incentive for the Duracell deal would pass any cigarette packet critique and has proven to be as savvy a business deal as they come. But what else would we expect from Mr Buffet?
