Duracell – Page 3 – Mazor'sEdge

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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.

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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.

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Elon Musk’s recent announcement of Tesla’s new home and industry battery business, which will enable the storage of solar and wind energy, would seem to directly threaten Berkshire Hathaway Energy’s role as one of the world’s largest energy producers.

But not so fast.

Let’s Look at the Big Picture

First, Tesla’s leading-edge automobiles have done a lot to popularize plug-in electric vehicles. These vehicles draw their power primarily from electric utilities, and as the technology takes hold with more mainstream automobile producers, such as Toyota, GM, and Ford, the total demand for electric power will skyrocket. Sure, some of the power may come from home-based electric generation through solar panels, but the total demand for electric power will rise as consumers switch from gas and diesel powered vehicles.

Secondly, for home and industry battery applications, Berkshire may benefit in multiple ways. Its minority ownership in Chinese battery maker BYD Co Ltd could prove a very wise investment, as the company adds 6 gigawatts per year of battery production capability over the next 3 years.

The End of the Utility?

Will solar panels linked to a Tesla Powerwall mean that the centralized distribution offered by utilities will be irrelevant? Maybe for someone living in the backwoods, or far out in the desert, but not for anyone still hooked up to the grid.

Net metering, which feeds excess electricity consumers produce back into the grid, and creates a billing mechanism that credits consumers, makes the batteries irrelevant, as they produce no cost-saving or other advantage.

Berkshire Hathaway Energy’s CEO Greg Abel thinks that Tesla’s storage technology would have to drop greatly in price for it to be applicable to BHE’s transmission business.

Abel called the technology, “not game-changing, and it’s because of the cost structure,” during a panel discussion put on by the Calgary Chamber of Commerce. “Is there an opportunity to now implement that into our systems, into our transmission and distribution systems? Absolutely. And is it completely cost-effective, no. It’s got to get cheaper.”

Don’t Forget Duracell

Berkshire’s acquisition of P&G’s Duracell unit, may shake things up if it can get Duracell to transition from the alkaline battery business to newer battery technologies, the company might be in just the right place to market products similar to Tesla. It certainly has the resources to do it, as the P&G deal includes $1.8 billion in cash.

Lastly, large-scale battery storage is just what Berkshire Hathaway Energy’s solar and wind farms need, be it the 550-megawatt photovoltaic Topaz Solar Farm in San Luis Obispo County, California, or the just announced 400-megawatt Grande Prairie Wind Farm in Holt County, Nebraska. The ability to store energy for the times that the sun isn’t shining and the wind isn’t blowing is just what utilities need to fully pull away from fossil fuel based energy generation.

In summary, new home and industry storage battery technology will give Berkshire Hathaway new competition for its existing companies, but it will also bring new opportunities.

(This article contains updated information)

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