Duracell

[Guest longinvestor]

Not much being said about this. What else makes this a Berkshire kind of subsidiary other than being the kind of product that will be consumed for a long time, easy to understand etc.? Do BYD, storage solution for Solar and Duracell intersect somehow? Also interesting that it has become part of Marmon, logic for that? Hope to hear more at the meeting.

[marazul]

Classic tax efficiency play. PG shares had unrealized gains, so exchanged the shares for Duracell. No tax leakage in the process. At BRK it will be a cash cow. Cash flows will be tax efficiently redeployed into other ventures.

[thepupil]

It's a pretty cool study in how Berkshire operates/used to operate. The investment started out as a  $600MM Gillette takeover defense convertible with a fat coupon, then became PG stock when PG took over Gillette, Buffett trimmed the PG a few times along the way, then had $336MM of cost basis left and converted his PG stock (which was at a pretty high valuation for a low growth staples co) into Duracell and cash through the transaction.

 

I don't think there's much to read other than they valued cash in hand plus a fully controlled slow decline/low growth business more than a deferred tax encumbered PG at close to 16X EBITDA. I interpreted this as a rare move down in quality in order to a) get a lot more cash flow under full control and b) tax efficiently monetize their PG.

 

I know I would rather Berkshire own a just okay biz at 11X free cash flow than PG at 23X earnings.

 

Along with having 3G dress up Heinz and issue stock at a very high valuation (like 3X where he bought it just a few years ago) for a stake in KHC, I think it's one of his more savvy moves of late. The man is a savvy monetizer of rich valuations despite his folky "I'm never gonna sell this and ideal holding period is forever blah blah blah".

 

BNSF is worth like 20X more, so no need to really analyze the business in order to gauge risk/reward of BRK as far as I'm concerned.

 

the history of the PG shares:

 

here's the original gillette investment, which, unbeknownst to me, was actually a takeover defense convertible preferred at juicy coupon. The lifetime of this investment is just awesome.

 

Buffett buys $600MM of Gillette 8.75% mandatory convertible preferred stock in 1989,  earns a shit ton of carry for 6 years, then PG takes over Gillette, he rolls his Gillette preferred into common stock of PG, earns divvies along the way, trims PG a few times, then converts the balance into Duracell a slowly declining business at 7X EBITDA and 11X free cash flow when PG is trading 15.5X EBITDA and 23X earnings. What an awesome 25 year investment!

http://www.iwarrenbuffettquotes.com/warren-buffett-gillette-investment-nyse-g/

http://articles.latimes.com/1989-07-22/business/fi-3487_1_warren-buffett

 

 

[bci23]

Duracell is a duopoly with Energizer thats why he wanted it.