Duracell’s Acquisition by Berkshire Hathaway – A Case Study

1. Introduction
Corporate restructuring is the process of changing a corporation's financial structure,
management and business model to maximize efficiency and increase the profitability of the
firm. There are three types of corporate restructuring - financial, operational and portfolio
restructuring - all aimed to enhance the performance of the firm, thereby increasing the
shareholders' wealth. The last category is the one under which our case study falls.
Portfolio restructuring refers to changes in ownership structure of the business lines of a firm
brought about by sale of businesses no longer needed or wanted and purchase of different
ones. It includes corporate divestitures (sale of stocks of businesses wholly or partly) and
mergers and acquisitions. When analyzing a divestiture strategy, the main decision that the
management has to make is the choice of the divestiture strategy.

2. Objective

This case is an attempt to analyze the divestiture strategy employed by P&G to divest
Duracell, that is, a split-off and how it was used for Duracell's acquisition by Berkshire
Hathaway. It also seeks to probe the choice of this strategy out of the options available like
that of spin-off and carve-out and study the benefits and impact of the acquisition on the three
aforementioned companies.

3. Company Background
Berkshire Hathaway:

Berkshire Hathaway is a holding company for a large number of organizations. It's controlled
by director and CEO Warren Buffett, a famed investor. Berkshire Hathaway is headquartered
in Omaha, Nebraska and was initially started as a group of textile milling plants.

As of March 12, 2019, Berkshire Hathaway had a market capitalization of about $500 billion,
making it the fifth largest company in the world in terms of market capitalization. Berkshire’s
stock trades on the New York Stock Exchange as two classes - class A shares and class B
shares. Class A shares trade for $304,000 per share as of March 12, 2019 – the most
expensive share in History.

The company wholly owns GEICO, Duracell, Dairy Queen, BNSF, Lubrizol, Fruit of the
Loom, Helzberg Diamonds, Long & Foster, Flight Safety International, Pampered Chef,
and NetJets. Besides this, the conglomerate has investments in major public companies, such
as United Airlines, Southwest Airlines, Apple Inc., Bank of America, and Coca-Cola.

Procter & Gamble:

The Procter and Gamble Company (P&G) is an American worldwide customer merchandise
enterprise headquartered in downtown Cincinnati, Ohio, established by English American
William Procter and Irish American James Gamble. It represents considerable authority in a
wide scope of individual wellbeing/shopper wellbeing, and cleanliness items; these business
lines can be segregated into Beauty; Grooming; Health Care; Fabric and Home Care; and
Baby, Feminine, and Family Care.

On August 1, 2014, P&G reported it was streamlining the organization, dropping and
auctioning off around 100 brands from its item portfolio so as to concentrate on the staying
65 brands which delivered 95% of the organization's benefits.

Duracell:

Duracell Inc., initially owned by The Gillette Company, is the world's largest manufacturer
and advertiser of superior soluble batteries. Known as P.R. Mallory for quite a long time after
it was established in 1935, the organization took on the Duracell name in 1978 when it was
procured by Dart Industries. The battery creator was associated with various acquisitions and
mergers, including one of the biggest utilized buyouts (LBOs) of the 1980s. Besides its
alkaline batteries, the organization sells lithium, zinc air, and battery-powered nickel-metal
hydride batteries including chargers and power systems. Gillette - parent to Duracell since
1996—was acquired by Procter and Gamble in 2005 and then by Berkshire Hathaway in
2016.

Duracell's major competitors are Energizer, Eveready Battery Company, Rayonac, VARTA
and Exide.

4. Acquisition in Detail
On November 14, 2014, Berkshire Hathaway stated its desire to buy Duracell of Proctor and
Gamble in an all-stock deal. The deal was completed on February 29, 2016 in which
Berkshire Hathaway acquired Duracell in a complex transaction that allowed Berkshire to
exchange 52 million shares held in P&G (worth 4.7 million dollars) and 1.8 million dollars in
cash for Duracell's full ownership. The cash proceeds were meant for a pre-transaction
recapitalization of Duracell. The purchase made use of a "spilt-off" – a strategy of
divestitures employed by businesses. Ultimately, the acquisition cost Berkshire about 3
billion dollars. (“Berkshire Hathaway to acquire Duracell”, 2014)
5. What is a split-off?
A split-off is a form of corporate reorganization in which a parent company divests a business
unit. Many approaches can be used to construct a divestiture. Split-offs, spinoffs and carve-
outs, are a few choices, each with its own structuring.
In a split-off, the parent company gives shareholders the option of either keeping their
existing shares or trading them for divesting company shares. Often, the parent company
offers a premium on the exchange of shares so as to incentivize its existing shareholders into
buying shares of the newly formed company.
Before the split-off, the split-off entity is a division or subsidiary of the parent entity that,
after split-off, becomes a separate legal entity owned by some of the parent organization's
shareholders and ownership of the parent entity is in the hands of the remaining shareholders
who do not surrender their shares for the split-off shares. Split-off is similar to a stock
buyback except that in a split-off, the subsidiary’s shares are being employed by the parent
company for the buyback instead of cash. (“Spin-offs and Split-offs”, n.d.)
In our case, P&G split-off Duracell to Berkshire which relinquished all its shares in P&G in
exchange for all of Duracell’s shares, thereby making the entire deal an “acquisition”.

6. Benefits for Both the Companies

Berkshire Hathaway:
i. Tax benefit - Buffett originally owned shares of Gillette, but in 2005, P&G acquired
Gillette and Buffett received a huge return on his shares. In the many years since,
Buffett's P&G stake continued to increase in value and Buffet had become P&G’s
fifth biggest shareholder. If Berkshire were to sell the investment in the open market,
it would have had to pay taxes worth 1 billion dollars on the capital gains. By
pursuing this deal, essentially trading the P&G stock for Duracell plus cash, Berkshire
was able to avoid these taxes. (Ciura, 2014)
ii. Buffet’s investment philosophy – Buffet’s is known for investing in businesses that
are underperforming but eventually turns them around through his investments. For
instance, Berkshire bought Fruit of the Loom, a company that manufactures clothing,
from the Bankruptcy Court in 2002 and made it into one of the leading clothing
brands. Duracell, too, was one such example.
 Duracell sales had been declining for some time then but Buffet saw predictability
and competitive strength in Duracell. Duracell was the market leader at that time with
25% market share. “I have always been impressed by Duracell, as a consumer and as
a long- term investor in P&G and Gillette,” Buffett said in the statement. (“Berkshire
Hathaway to acquire Duracell, 2014, p.4). To sum up, Duracell fit well into Buffet’s
portfolio.

iii. Fair price tag - One factor that worked in Buffett's favour, in addition to the
significant tax benefit, was the purchase price of the deal. Duracell was trading at
EBITDA multiple of 7 while its rival Energizer Holdings was trading at EBITDA
multiple of 10 at that time. Hence, Berkshire Hathaway profited by acquiring Duracell
at a cheaper price than its rival. (Ciura, 2014)

Proctor & Gamble:

i. Focus on core businesses - In August 2014, P&G had announced that it would trim its
portfolio down to 65 brands by selling half of its global brands that were not deemed
critical to the company's future. Batteries definitely qualified as a business that could
be shed under this criteria, as the battery industry had seen sales slow. According to
analysts from S&P Capital IQ, Duracell sales had declined by 2% to 4% for the past
few years. In addition, long-term battery growth prospects were not too promising for
P&G as the demand for disposable batteries was expected to shrink. Though Duracell
is a maker of rechargeable batteries as well, its sales depend mostly on disposable
alkaline ones. Therefore, this deal was perfectly aligned with the company’s strategy
of focusing on core businesses to increase profits. (Ciura, 2014)
ii. Value to the Shareholders – The deal created value for the shareholders by reducing
the number of outstanding shares and increasing EPS in the short term by way of the
split off (as mentioned earlier, split-off is akin to a stock buyback) and aimed to
increase P&G’s share price in the long term via adoption of the then CEO AG
Lafley’s streamlining strategy. (Ciura, 2014)
iii. Tax benefit – The deal was executed in such a way that the spilt-off was a tax-free one
for P&G as it fulfilled all the requirements under Section 355 of the US Internal
Revenue Code. (“Spin-offs and Split-offs”, n.d.)
Buffett's Investing Philosophy
Buffett’s tenets fall into the following four categories:
Business
Management
Financial measures
Value
i. Business Tenets
Buffett restricts his investments to businesses he can easily analyze. After all, if a
company's operational philosophy is ambiguous, it's difficult to reliably project its
performance.1  For this reason, Buffett did not suffer significant losses during the dot-
com bubble burst of the early 2000s due to the fact that most technology plays were
new and unproven, causing Buffett to avoid these stocks.2
ii. Management Tenets
Buffett's management tenets help him evaluate the track records of a company’s
higher-ups, to determine if they've historically reinvested profits back into the
company, or if they've redistributed funds to back shareholders in the form
of dividends. Buffett favors the latter scenario, which suggests a company is eager to
maximize shareholder value, as opposed to greedily pocketing all profits.
Buffett also places high importance on transparency.After all, every company makes
mistakes, but only those that disclose their errors are worthy of a shareholder’s trust.
Lastly, Buffett seeks out companies who make innovative strategic decisions, rather
than copycatting another company’s tactics.
iii. Tenets in Financial Measures
In the financial measures silo, Buffett focuses on low-levered companies with high
profit margins. But above all, he prizes the importance of the economic value added
(EVA) calculation, which estimates a company’s profits, after the shareholders’ stake
is removed from the equation. In other
On first glance, calculating the EVA metric is complex, because it potentially factors in
more than 160 adjustments. But in practice, only a few adjustments are typically made,
depending on the individual company and the sector in which it operates.
Buffett's final two financial tenets are theoretically similar to the EVA. First, he
studies what he refers to as "owner's earnings."5 This is essentially the cash flow
available to shareholders, technically known as free cash flow-to-equity (FCFE).
Buffett defines this metric as net income plus depreciation, minus any capital
expenditures (CAPX) and working capital (W/C) costs. The owners' earnings help
 Buffett evaluate a company’s ability to generate cash for shareholders.
iv. Value Tenets
In this category, Buffett seeks to establish a company's intrinsic value. He
accomplishes this by projecting the future owner's earnings, then discounting them
back to present-day levels. Furthermore, Buffett generally ignores short-term
market moves, focusing instead on long-term returns. But on rare occasions, Buffett
will act on short-term fluctuations, if a tantalizing deal presents itself. For example, if a
company with strong fundamentals suddenly drops in price from $50 per share to $40
per share, Buffet might acquire a few extra shares at a discount.

7. Impact

Procter & Gamble:

Major impact on P&G’s operations after massive portfolio restructuring was:

i. P&G was looking for more revenue growth which it successfully achieved after
divestiture of non-essential brands. It was now much stronger, more profitable
company than it was just a few years ago.
ii. Post the divestitures, in June 2018, it reported 3% surge in sales and reported earnings
of US$9.750 billion. The annual revenue in 2018 was US$66.832 billion, an increase
of 2.7% over the previous fiscal cycle.( “annual report”, 2018)
iii. On an average, its shares traded at over $86 per share in 2017-2018 which traded at
$70 per share before acquisition.(“P&G transformation delivering strong results”, 2017)
iv. Additionally, the corporate restructuring helped P&G reduce cost on goods sold, cut
down marketing and advertisement expenditure by $100 million and overhead costs
by more than $10 billion and improved profit per employee by 45%. (“Analyst press
release”, 2016)
A comparison of P&G’s financials makes the above points clearer.

2018 2017 2016 2015 2014

Net Sales $66.8 $65.1 $65.3 $70.7 $74.4

Operating Income $13.7 $14.0 $13.4 $11.0 $13.9

Net Earnings $9.8 $15.3 $10.5 $7.0 $11.6

Attributable to P&G
Net Earnings Margin 14.8% 15.7% 15.4% 11.7% 14.3%

from Continuing
Operations
Diluted Net $3.67 $3.69 $3.49 $2.84 $3.63

Earnings per
Common Share
from Continuing
Operations
Diluted Net Earnings $3.67 $5.59 $3.69 $2.44 $4.01

per Common Share

1
Operating Cash Flow $14.9 $12.8 $14.0 $15.4 $14.6

Figure X. Procter&Gamble. Reprinted [or adapted] from Annual Report (2), 2018

Berkshire Hathaway:

Along with Duracell’s acquisition on February 29, 2016 worth $4.7 billion, Berkshire
Hathaway had acquired another company Precision Castparts, aerospace and defence material
manufacturing company, for $32.7 billion in the same quarter on January 29, 2016.

After these two acquisitions, Berkshire Hathaway’s profits surged 25% profit in the
following quarter. Moreover, these acquisitions helped Berkshire compensate its debt owed
by its subsidiary, Burlington Northern railroad, a railroad company, where income had
dropped by14% in the midst of declining shipments of coal, oil based goods and sand utilized
in fracking. (“profits at buffet’s Berkshire up 25%”, 2016)

Duracell:

Just a year after the acquisition, it was safe to say that the market for Duracell’s batteries was
healthy.

i. Under Buffet, Duracell had full autonomy in contrast to P&G. It made its supply
chain more efficient by closing its packing plant in Cleveland, Tennessee. It started
with digital marketing on Digiday and sold alkaline batteries on Amazon which it
couldn’t do earlier due to trademarks and budget constraints in P&G. Alkaline
batteries captured around third of all sales (ciura, n.d)

ii. Duracell's sales rose by 6% yearly starting from the third quarter of 2016. Duracell
batteries in the U.S. alone hit $1 billion every year from 2016, leaving behind its
significant rival brands, Eveready and Rayovac (“strong 2017 sales for duracell”,2018)

iii. The 2017 hurricane that hit Caribbean and its neighbouring countries proved that
rechargeable batteries could be used only for limited hours when the power grid goes
offline. On the other hand, alkaline batteries are durable with a storage life of more
than 10 years. Due to this incident, not only did Duracell’s sales of alkaline batteries
go up in the region but it also proved that disposable batteries were still relevant.
(“strong 2017 sales for duracell”,2018)
 iv. Duracell’s CopperTop and Quantam batteries reported the highest average sales.
These products had a combined market share of 50%.

v. This graph shows the turnover and profits of Duracell in 2016 and 2017. In 2017, the
company had generated roughly 100.2 million British pounds in turnover which was
$2 billion earlier when it was under P&G. Profits for the year amounted to 6.4 million
British pounds.

Financial performance of duracell from

2016-17
(in 1000 British Pounds)
6350.8
profit for the year
1556.5

44219.6
gross
31,721.90
profit

100238.6
turno
81,911.40
ver

0.0 20,000.0040,000.0060,000.0080,000.00 1,00,000.00

0 1,20,000.00
201 201
7 

Figure X. financial performance of duracell UK. Reprinted from statista.com:

https://www.statista.com/statistics/816118/duracell-uk-limited-financial-performace/, 2018 by
N.Sonnichsen, Retrieved from URL.

8. Why a split-off over a spin-off or a carve-out?

As mentioned earlier, there are two other forms of divestitures namely spin-off and carve-out.
So one might ask why P&G did not opt for either of the two ? Before we delve deep into the
reasons, it is important to understand what spin-off and carve-out are.

In a spin-off, the parent company distributes new shares of the subsidiary to its existing
shareholders on a pro-rata basis, creating a separate legal entity with its own management
team and board of directors. Each current shareholder benefits by now holding shares of two
separate companies after the spin-off instead of just one. The parent company doesn’t receive
any cash in a spin-off. (Picardo, 2019)

A carve-out is the partial divestiture of a business unit where a parent company sells a
subsidiary’s minority interest to outside shareholders through an initial public offering (IPO).
A corporation carrying out a carve-out does not fully sell a business unit, but instead sells a
small equity stake in that business while maintaining the majority equity stake. Unlike a spin-
off, a carve-out enables the parent company to receive cash in return. (Hayes, 2019)

A spin-off was not used to divest Duracell because after mere 20 days of P&G’s public
announcement on October 24, 2014 to spin-off Duracell, Berkshire Hathaway declared its
intention to swap its shares in P&G for Duracell. Under a spin-off, Berkshire wouldn’t have
been able to get full ownership of Duracell as the new shares of Duracell would have been
distributed on a pro rata basis to all the shareholders, that is, Berkshire’s 1.9% stake in P&G
would have translated into mere 1.9% stake in Duracell. Also, P&G wanted to get Duracell
off its hands as soon as possible as a part of its wide restructuring scheme and an offer of this
kind by Berkshire helped P&G achieve exactly that.

Secondly, P&G wanted to reduce the number of its outstanding shares and increase EPS for
its shareholders. This could only be made possible by a split-off as shares outstanding remain
the same in spin-off and carve-out.

A carve-out got ruled out too because the law stipulates that the parent company can only
divest 20% of its voting interest in the subsidiary through the IPO while P&G’s intent was to
divest 100% interest in Duracell. Moreover, a company uses a carve-out if it believes that
there is no single buyer for the divesting business. In our case, however, P&G easily found
one for Duracell.

P&G could have spun off Duracell after a carve-out too but that process would have been
longer than a one-time divestment through a split-off to a strategic buyer.
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Investopedia. Warren Buffett: How He Does do it ? Retrieved from

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Compiled By:
Vanshika Gupta 18389 BFIA 3B
Sukhman Arora 18382 BFIA 3B
Tanya Batra 18386 BFIA 3B