Warren Buffet’s purchase of Duracell was more about business than batteries

Posted on 16 Dec 2014 by Tim Brown

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?