Monthly Archives: July 2015

BYD a Willing Partner

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Berkshire Hathaway’s roughly 10% ownership in BYD Company Limited, the Chinese automobile and new energy company that is the largest supplier of rechargeable batteries in the world, makes the company especially worth watching for Berkshire shareholders.

In 2008, Berkshire Hathaway placed a major bet on BYD’s potential when it purchased 225 million shares, and the company has not disappointed as it has aggressively moved into new markets.

A Willing Partner

While Tesla has mostly gone it alone, BYD not only manufactures its own line of cars and buses, but it is willing to form manufacturing partnerships that give it entry into new markets.

The key is BYD’s electric vehicle technology that makes it an excellent partner for other manufacturers looking to meet ambitious climate change and pollution goals.

On July 27, 2015, BYD announced a joint project worth $29.6 million deal with British bus manufacturer Alexander Dennis Limited to build 51 single-deck zero-emission buses for London. The buses will utilize BYD’s chassis and electric drivetrain with the bodies supplied by ADL. The partnership helps London move towards its goal of having all single-deck buses totally emission-free by 2020.

“This combination will deliver a unique vehicle which we believe will have a strong appeal in London and elsewhere in the UK,” said Isbrand Ho, the managing director of BYD Europe.

The buses will run on two routes served by London bus operator Go-Ahead London, and are scheduled to be in service by August 2016.

“Working together with our partners and friends at ADL we can provide a truly optimized blend of expertise. Our deep experience of not only battery technology but the critical battery management systems and driveline components necessary to deliver unequaled range and reliability are matched to ADL’s strong track record in building low weight, attractive and durable buses,” Ho said.

“We are delighted to have placed this order with BYD and have every confidence that along with ADL. They will deliver the world’s most advanced, zero-emission, pure electric bus fleet, and one that will match the rigorous demands of the London operating environment. This is a considerable step towards a cleaner, greener London bus fleet,” noted Richard Harrington, engineering director of Go-Ahead London.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Berkshire’s AT&T Stake Echoes P&G Deal

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With AT&T’s acquisition of DirecTV now completed, Berkshire finds itself a major shareholder in AT&T at a price far more favorable than if it had originally gone out and bought AT&T stock.

At the time that AT&T announced the $48.5 billion acquisition of DirecTV, Berkshire  owned 34.5 million shares of DirecTV. Those shares were purchased at roughly half the tender price of $95 per share that was offered by AT&T.

At the $95 share price, Berkshire’s holdings were worth at least $3.27 billion, provided that it did not accumulate any additional shares after March 31, 2014.

After the merger, each DirecTV share has converted to 1.892 shares of AT&T common stock and $28.50 in cash. Berkshire has ended up with 59.4 million shares of AT&T with a value of roughly $2 billion, and also received roughly $900 million in cash.

Todd Combs and Ted Weschler Pick a Winner

Berkshire’s DirecTV stake was purchased by Todd Combs and Ted Weschler, as a part of portfolios they manage on behalf of the company.

Combs and Weschler each manage $7 billion portfolios, and have seen the amount of money under their supervision increased significantly in the past two years as Warren Buffett has grown more confident in their approaches.

The Future of Berkshire’s AT&T Stake

Berkshire has not announced any plans for its AT&T stake, but it wouldn’t be surprising if it held on to it long-term. Berkshire has a history of sitting on its stock positions and letting the dividends pour in. Currently, AT&T pays $1.88 annually for a return of 5.5% based on a share price around $34. However, with Berkshire’s cost basis less than half of that share price its yield is effectively 11%.

The deal is reminiscent of Berkshire’s $600 million investment in Gillette, which through a merger eventually became a $4.7 billion stake in Procter & Gamble.

Berkshire recently liquidated its stake in P&G by swapping P&G stock for the company’s  Duracell battery division, which was also recapitalized with $1.7 billion in cash.

The move helped Berkshire avoid the large capital gains tax that would have been due if it had simply sold its P&G shares, and brought the world-leader in batteries under its corporate umbrella.

Who knows what the future holds for its AT&T stake?

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

 

Greg Abel Represents Berkshire at White House Climate Change Meeting

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It’s no surprise when Warren Buffett attends a meeting at the White House, but it was not Buffett who was there this past Monday, it was Greg Abel, who heads up Berkshire Hathaway Energy, and is also rumored to be the leading candidate as Buffett’s successor.

On July 27, Berkshire Hathaway Energy and some of the largest companies in the nation gathered at the White House to officially launch the American Business Act on Climate Pledge, a demonstration of the U.S. private sector’s commitment to taking on the global challenge of climate change.

Greg Abel, who serves as the chairman, president and CEO of Berkshire Hathaway Energy, and Cathy Woollums, senior vice president, environmental services and chief environmental counsel, attended the meeting, which was led by U.S. Secretary of State John Kerry.

Other companies that sent representatives included Alcoa, Apple, Bank of America, Cargill, Coca-Cola, General Motors, Goldman Sachs, Google, Microsoft, Pepsi, UPS and Walmart.

Through participation in the meeting, U.S. business leaders voiced their support for a strong outcome in the international climate negotiations taking place in Paris this December. Participating companies pledged to take specific, quantifiable steps to reduce emissions, increase low-carbon investments, use and build more clean energy, and deploy cleaner vehicles, among other actions.

“As a provider of essential energy services, our customers depend on us to power their lives and livelihoods,” said Abel. “And we know that they expect us to do that in a way that respects the environment we share. For more than a decade, we have been making significant investments to reduce the impact of our operations on the environment and fostering a more sustainable future by developing renewable energy generation and reducing emissions from our facilities. Joining these other U.S. businesses is one more way we can demonstrate our commitment to lead on climate action.”

Berkshire’s Renewable Energy Commitment

Berkshire Hathaway Energy has already invested more than $15 billion in renewable energy generation projects that are under construction and in operation through 2014, and has pledged to invest up to an additional $15 billion going forward.

In May, BHE announced a 400-megawatt wind farm that will be located about 12 miles northeast of O’Neill, Nebraska, and will begin construction this summer. The completion date will be in 2016. The new wind farm will be the largest in the state and will increase Nebraska’s wind energy capacity by nearly 50 percent.

Berkshire Hathaway Energy owns a portfolio of businesses that provide electric and natural gas services to more than 11.5 million customers and end-users worldwide. Its family of businesses includes U.S. utilities MidAmerican Energy Company, NV Energy, Pacific Power and Rocky Mountain Power, as well as interstate natural gas pipeline, electric transmission and renewable energy businesses, and distribution networks in the United Kingdom.

“U.S. utilities have been transitioning to a cleaner generating fleet for years, resulting in a 15 percent reduction of carbon dioxide emissions below 2005 levels,” Abel said. “Berkshire Hathaway Energy is leading by example. We have long supported and made investments to advance climate-friendly solutions that move us forward toward a low-carbon, sustainable future.”

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

New Tank Car Standards Means New Facility and Employees for UTLX

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Berkshire Hathaway’s wholly-owned tank car manufacturer UTLX is opening a new facility in Marion, Ohio, and will be adding 200 new employees over the next three years. The expansion will double the number of employees it has in Marion.

The move comes as new federal safety standards have created unprecedented demand for new and retrofitted tank cars.

Retrofitting the Existing Fleet

Under the Enhanced Standards for New and Existing Tank Cars for use in an HHFT— Existing tank cars must be retrofitted in accordance with the DOT-prescribed retrofit design or performance standard for use in an HHFT.

An HHFT is defined as a train carrying 20 or more tank carloads of flammable liquids (including crude oil and ethanol).

The need for replacement and retrofitted tank cars impacts shippers that ship by rail, including shippers of LPG, oil producers and refiners, and ethanol producers that own their own tank cars or lease them from leasing companies, and Berkshire’s BNSF Railway’s own fleet of tank cars.

Retrofitting existing tank cars is an important bridge to safer shipping of flammable liquids, as the current backlog of new tank car orders sits at a record 52,000 units. 

The new facility is be able to rewrap 60 tank cars a week when it reaches full capacity.

 A Bundle of Tax Credits and Grants

The Ohio Tax Credit Authority granted a 55-percent, 5-year tax credit to UTLX for the creation of $8,272,000 in new annual payroll, provided that the company maintains operations at the facility for 11 years.

The company will also receive a $75,000 grant from the Ohio Rail Development Commission to cover the cost of on-site rail improvements.

Greg Cieslak, president of UTLX, noted, “We have a quick need to expand into a second facility due to the industry’s changing landscape, and found the Columbus Region to be a strategic location to grow. The area offers access to the right workforce and real estate to fit our needs, and the Midwest location and rail infrastructure are convenient to our customers.”

Higher Paying Job Opportunities

The new employees will earn between $15 to $21 per hour plus benefits. The jobs include welders and fabricators, tank car repairers, rail car switchmen, material handlers, and general labor and helpers with general welding knowledge.

UTLX is looking to the Tri-Rivers Career Center’s workforce development program to provide training for the new employees.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Commentary: Is Now the Time for Berkshire to Pull the Trigger on USG?

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With demand for housing finally outstripping supply in a number of markets, the need for drywall and other construction supplies looks finally to be reviving from the lingering doldrums of the Great Recession.

Building permits for new houses rose a stellar 30-percent in June 2015, as compared to the same time period in 2014.

The rise in new housing starts, which are up 26-percent year-to-year, is certainly welcome news for Berkshire Hathaway’s Johns Manville, which makes insulation and roofing products, and it’s good news for many of Berkshire’s Marmon Group companies that manufacture materials used in both commercial and residential construction.

The revival in new housing is also great news for USG Corporation (formerly known as United States Gypsum Corporation), which is North America’s leading manufacturer of drywall and related building products.

About USG

In 1902, 30 independent gypsum rock and plaster manufacturing companies merged to form the United States Gypsum Company.  Over more than a century, USG has been issued 1,100 patents for its products. In addition to drywall, the company is a leading manufacturer of acoustical panel and specialty ceiling systems. The company has 34 manufacturing plants in the U.S., and has roughly 9,000 employees in more than 30 countries.

USG and Berkshire

Berkshire has had a growing minority stake in USG that goes back to the nadir of the recent financial crisis.

In 2008, with the housing market imploding and lending all but frozen, Berkshire came to USG’s rescue with $300 million of convertible notes that paid Berkshire 10-percent interest.

At the time, the boost in confidence the company received from Warren Buffett’s financing helped the company avoid bankruptcy. The day of transaction the stock soared 22-percent to $6.89 a share.

Today, the stock is hovering around $29 per share.

Berkshire has not only profited from the healthy interest payments, but the stock’s appreciation as well.

In December 2013, Berkshire exchanged $243.8 million of the convertible notes for common stock, and with additional purchases its stake in USG now sits at just under 40-percent.

The Chinese Drywall Scandal

As an American manufacturer, USG has been a beneficiary of the Chinese drywall scandal that came to a head in 2009. Imported drywall from China that had high sulfur content brought reports of fumes that created upper respiratory problems, and the market for drywall from China was hit hard. Thousands of homes in Florida and other states had their drywall ripped out and replaced.

Time to Pull the Trigger?

The Chicago-based company has seen its ups and downs, including three bankruptcies.

The last bankruptcy was in July 25, 2001 under Chapter 11 in order to deal with a mountain of asbestos litigation costs related to asbestos containing joint compounds.

The establishment of the The United States Gypsum Asbestos Personal Injury Settlement Trust put the company’s asbestos woes in the rear-view mirror, and its stock price reflects it. With the growing strength in the new housing market, its roughly $29 share price looks poised to move past the 5-year high of $35.33 that it hit in February 2014.

With a Market Cap of just over $4.2 billion ($1.5 billion of which is already owned by Berkshire), USG is a great fit for Berkshire if it wants to gobble up the whole thing, or if it just wants to continue its incremental takeover by moving to over 50-percent ownership.

USG would fit nicely into the Marmon Group of companies, which include a host of companies that supply the construction industry.

Berkshire might want to consider a tender offer for the company’s outstanding stock, because it just looks to get more expensive from here, as the housing market finally has put the drywall business back in high demand.

All it takes is a little cash, which is something Berkshire’s got a lot of.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Berkshire Wins EU Approval for Duracell Acquisition

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Berkshire Hathaway has gained approval from the European Commission for its acquisition of battery-maker Duracell from Procter & Gamble.

In a statement released by the Commission:

“The Commission concluded that the proposed acquisition would not raise competition concerns given the absence of horizontal overlaps and the existence of numerous competitors in the vertically related market where the parties are active. The transaction was examined under the normal merger review procedure.”

About Duracell

With Duracell’s $2 billion in annual revenue, Berkshire is acquiring the market leader in batteries for the home and workplace. The company has highly recognizable brands that consumers in home and work settings are willing to pay more for than private label store brands. According to the company, Duracell’s CopperTop® and Quantum® command the highest average percent of spend among battery brands with 33% and 16%, respectively.

Combined, the two product lines account for close to 50% of the market.

For a look at what type of company Berkshire is getting read this special report.

©2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Berkshire’s PURPA Dreams Evaporate

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Berkshire Hathaway’s effort to change the Public Utility Regulatory Policies Act (PURPA) in order to loosen the regulations on power purchases from small generating facilities has met a dead end.

The changes Berkshire has been aggressively lobbying for have been dropped from the U.S. Senate’s energy bill.

Berkshire Makes Its Case

Last week, Berkshire Hathaway Energy Legislative and Regulatory Affairs Vice President Jonathan Weisgall testified before the Senate Energy and Natural Resources Committee pushing a rule change to make electric utilities in California’s new Energy Imbalance Market that are in noncompetitive markets exempt from having to purchase power from small generation assets known as Qualified Facilities (QFs).

Weisgall‘s prepared statement noted that “In many instances, the power produced by QFs is not needed to replace baseload generation or meet decreasing levels of demand.”

He also noted that “Growth of electricity demand has slowed in each decade since the 1950s. Since PURPA’s enactment, electricity markets have developed to allow utilities to purchase replacement power rather than build baseload plants. BHE’s PacifiCorp utility is experiencing a significant increase in PURPA contract requests, despite the fact that its long-range resource plan shows no need for additional generation resources until 2028. It currently has requests for 3,641 MW of new PURPA contracts, in addition to the 1,732 MW of PURPA contracts that are already executed. The number of PURPA contracts may soon equal PacifiCorp’s average retail load. For example, the 5,373 MW of existing and proposed PURPA contracts at their nameplate capacity would be equal to 79% of PacifiCorp’s average retail load and 108% of PacifiCorp’s minimum retail load.”

Senator Cantwell Objects

Berkshire laid out a proposed amendment to PURPA Section 210 16 U.S. Code § 824a–3 – Cogeneration and small power production, but the objections of Sen. Maria Cantwell (D-WA), who laid out her concerns that it could adversely impact the energy market in the Pacific Northwest, effectively killed the amendment.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

No Oncor for Berkshire Hathaway

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Forget Berkshire Hathaway as the next owner of Energy Future Holdings’ power distribution subsidiary Oncor.

Back in September 2014, Berkshire Hathaway Energy and several other energy companies, including NextEra Energy and Hunt Consolidated, signed confidentiality agreements for the purpose of exploring the acquisition of Oncor, which was up for auction due to the April 2014 bankruptcy of electric utility Energy Future Holdings. The company went under after being burdened with $40 billion in debt from a 2007 leveraged buyout.

A Texas-Sized Asset

Oncor is a quite a prize. The company is a regulated electric transmission and distribution service provider that serves 10 million customers across Texas. The company has the largest distribution and transmission system in Texas; with approximately 119,000 miles of lines and more than 3 million meters across the state.

The End of the Waiting Game

After originally pushing back the auction of Oncor from November 2014 to March 2015, it now looks like no auction will ever happen. Instead, the creditors in the holding companies Energy Future Intermediate Holdings and Energy Future Holdings will take ownership of Oncor.

U.S. Bankruptcy Judge Christopher Sontchi has agreed to a plan by Hunt Consolidated that will see the company take ownership with Oncor’s current management remaining in place.

One that Got Away

Back in June 2014, Warren Buffett proclaimed he was ready to put at least $15 billion into energy generation and transmission assets, and Oncor, with a value of roughly $17.5 billion looked like a good fit.

Transmission lines have been high on Berkshire Hathaway Energy’s wish list of late. In April 2014, the company made a $2.9 billion purchase of Canadian company AltaLink from SNC-Lavalin Group Inc.

Berkshire Hathaway Energy currently has $70 billion in assets, including one of the largest portfolios of renewable energy in the world.

Unfortunately, when it comes to Oncor, this one got away.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Owl Wire Rehabs Manufacturing Plant

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Owl Wire and Cable, a unit of Berkshire Hathaway’s Chicago-based Marmon Group, is set for a $1 million rehab of its Madison Street manufacturing plant in Rome, New York. The work will include a new roof, and repairs to walls, floors and columns.

Owl Wire and Cable produces a wide range of sizes and classes of wire and cable. The company employs about 45 people.

The building was previously owned by Rome Cable, which filed for bankruptcy in 2003.

About Owl Wire

Owl Wire and Cable was founded in 1954, and is a manufacturer of un-insulated copper wire and cable for a variety of end uses, including:

  • Electrical and electronic wire and cable for energy-related markets servicing the oil, gas, nuclear, and wind energy markets.
  • Low and medium voltage cables are provided to the appliance, building, mining, and industrial markets.
  • Varied specialty cables utilized in aeronautical, high temperature, and marine markets.
  • Transit, aerospace, defense, communication and other industrial applications. Uses include industrial power and instrumentation; aerial and underground utility distribution; and environments where exposure to harsh elements is anticipated.

The company has three facilities totaling more than 350,000 square feet of manufacturing space.

Corporate Headquarters and manufacturing are located in Canastota, New York, with manufacturing facilities also located in Rome and Boonville, New York.

Berkshire and Marmon

In 2007, Berkshire Hathaway acquired 60% of the Marmon Group for $4.5 billion from the Pritzker Family of Chicago. At the time, Marmon was made up of 125 manufacturing and service businesses that all operated independently within diverse business sectors.

Berkshire has gradually increased its stake in Marmon even as Marmon has grown, and in 2013 it bought the remaining 20% share owned by the Pritzker Family.

Today, Marmon Group has 160 independent manufacturing and service businesses and employs 17,000 people worldwide.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: What is Berkshire Getting With Duracell?

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On July 29, 2015, leading battery maker Duracell, which has been a unit of Procter & Gamble, will become wholly owned by Berkshire Hathaway.

The deal will bring Berkshire both a top consumer brand and a mountain of tax-free cash.

While Berkshire had announced that Duracell would become part of its Marmon Group of companies, a Marmon spokesman assured me that it will be an independent company that will report directly to Berkshire management.

What Kind of Company is Duracell?

Berkshire is acquiring the market leader in batteries for the home and workplace. In fact, despite P&G having planned to sell-off the unit, Duracell’s market share has grown from 48% in 2012 to 56% in 2014.

The company has highly recognizable brands that consumers in home and work settings are willing to pay more for than private label store brands. According to the company, Duracell’s CopperTop® and Quantum® command the highest average percent of spend among battery brands with 33% and 16%, respectively.

Combined, the two product lines account for close to 50% of the market.

Duracell’s growth has come at the expense of competitors Energizer and Rayovac.

Energizer has seen its market share shrink from 40% in 2012 to 36% in 2014, and Rayovac, which is a much smaller player, has seen its market share drop from 8% in 2012 to just 5% in 2014.

The total alkaline battery market in the U.S. alone is roughly $2.2 billion a year, with Duracell just over $858 million in alkaline batteries sales a year, or roughly 43% of the market.

Of the away-from-home market, healthcare/medical uses $70 million worth of batteries annually, followed closely by manufacturing, which consumes approximately $61 million worth of batteries annually.

A Changing Market

Offices and other workplaces use batteries more than ever. For decades, flashlights where the primary drivers of battery usage in away-from-home settings, but that has changed greatly in just the past few years. According to a report by Kline & Company, wireless devices, including computer mice and keyboards, topped the list in 2014 in the demand for batteries. Wireless mice were the number one use for batteries followed by clocks and remote controls. The traditional flashlight has fallen to number seven, just above smoke alarms.

A Growing Market

At the time of the announcement of Berkshire’s acquisition of Duracell, many analysts downplayed the battery market’s potential for growth. I believe that view is short-sighted, as the away-from-home battery market has not only grown 2% from 2012 to 2014, but Duracell’s share of that market has continued to grow. Batteries are more relevant than ever with the number of wireless devices proliferating.

A Proven Name, A Trusted Brand

Warren Buffett loves quality brands, be they Coca-Cola, Heinz, or Kraft. He knows that consumer brand loyalty is essential for retaining market share in commodity businesses. In Duracell, Berkshire’s getting the most trusted name in batteries.

The 2015 BrandSpark Most Trusted Awards winners for Consumer Packaged Goods brands, which were voted by more than 80,000 American consumers, chose Duracell as the most trusted battery brand.

But Wait, There’s More!

Berkshire’s not only acquiring the market leader for batteries, it’s also receiving a Mount Everest-sized bundle of tax-free cash.

Berkshire’s $4.7 billion stake in Procter & Gamble came from an original investment in Gillette of only $600 million. In cashing out its position, Berkshire not only gets control of Duracell, but Duracell has been recapitalized by P&G with $1.7 billion in cash. This allows Berkshire a transfer of cash that is three times its original investment in Gillette, and the entire $4.7 billion transaction incurs no capital gains taxes.

For Berkshire, Duracell shines brightly indeed.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.