(BRK.A), (BRK.B)
2016 is starting off with some heavyweight acquisitions for Berkshire Hathaway.
Berkshire’s acquisition of aerospace manufacturer Precision Castparts closed on January 29, and February should be when Berkshire finally swaps it shares of Procter & Gamble’s stock for the company’s Duracell division.
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® batteries command the highest average percent of spending among battery brands, with 33% and 16%, respectively.
Combined, the two product lines now 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 Mountain of Tax Savings for Berkshire
Berkshire’s not only acquiring the market leader for batteries, it’s also receiving a Mount Everest-sized bundle of tax-free cash.
By acquiring Duracell, Berkshire is able to cash out its $4.7 billion stake in Procter & Gamble that 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, the Duracell deal shines brightly indeed.
© 2016 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.