This morning, Warren Buffett's Berkshire Hathaway (BRK.A, BRK.B) announced that it was buying the Duracell battery business from Procter and Gamble (PG) in a deal valued at $3 billion. Everything about the deal is a classic Warren Buffett investment.
Last month, P&G announced that it wanted to divest itself of the Duracell business. Becoming a smaller, more-focused consumer products company is the new plan at P&G and shedding non-core businesses is a key objective of management.
The deal, as is often the case, was structured brilliantly. Instead of cash, Buffett is paying for the deal using P&G stock that Berkshire has owned for years. The shares in P&G that Berkshire is handing over are worth about $4.7 billion. Duracell will come to Berkshire with $1.7 billion in cash that P&G will contribute before the deal closes.
Investors are going to have a field day with this one.
With Procter and Gamble shares trading at 52-week high, is Buffett using this deal to cash out at the top? This deal has given Berkshire a way to dispose of $5 billion in stock without disrupting the share price. I would also suspect that there are some favorable tax implications in doing an equity-for-business swap like this.
On the other hand, Procter and Gamble is basically buying back $4.7 billion in equity in one fell swoop, which could be a sign that management thinks its shares are undervalued.
Perhaps this is a win-win in terms of capital allocation.
Both the mechanics of the deal and the type of company bought are classic Buffett moves. Buffett is big on brands and sees tremendous value in them. Duracell, along with Energizer (ENR), dominate the battery market, so Buffett is basically getting a duopoly-type business. Energizer is currently valued at nearly $8 billion, so Buffett is getting the other player in the space for less than 50% of Energizer's market cap.
At the end of day, Warren Buffett continues to use his brand as the ultimate currency: an ability to do deals that no one else can do. Another brilliant capital allocation bet for Berkshire and shareholders.