DURACELL’S ACQUISITION

BY BERKSHIRE HATHAWAY
A CASE STUDY

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18389 VANSHIKA GUPTA
18382 SUKHMAN ARORA
18386 TANYA BATRA

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 CONTENTS

INTRODUCTION & ACQUISITION VIA A CONCLUSION

OBJECTIVE SPLIT-OFF

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COMPANY BENEFITS AND
BACKGROUND IMPACT

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 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.

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 Objectives

OBJECTIVES OF OUR CASE STUDY

1 To analyse 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

2 To probe the choice of this strategy vis-à-vis spin off and carve-out

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COMPANY BACKGROUND

• Berkshire Hathaway is owned by a WARREN

BUFFET, a famed investor.

• Headquartered in Omaha, it initially started

as a textile group.

• Listed on New York Stock Exchange with

Class A and Class B shares. Class A shares
traded at $304,000 per share as of March12,
2019, the most expensive till date.

• Wholly owns GEICO, Duracell, Dairy Queen

etc. Besides this, it has invested in companies
like United Airlines, Southwest Airlines, Apple

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Inc, Bank of America and Coca Cola.

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COMPANY BACKGROUND

• American merchandise enterprise

headquartered in Cincinnati, Ohio.

• It specializes in several range of product

segments like Beauty, Fabric & Homecare,
Feminine and Baby Products.

• On August 1, 2014, it reported streamlining

its major product lines and divested 100
brands and concentrated only on 65
profitable ones which had been delivering
95% of the organization’s benefits.

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COMPANY BACKGROUND

• Initially owned by The Gillette Company,

Duracell is the world’s largest manufacturer
of soluble batteries.

• Undergone various acquisitions & mergers,

including one of the biggest LBO in 1980’s.

• Gillette was the parent to Duracell since 1996

which was acquired by P&G in 2005 and then
by Berkshire Hathaway in 2016.

• Major rivals – Energizer, Eveready, Rayonac,

VARTA & Exide.

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 ACQUISITION IN DETAIL ON FEBRUARY 29, 2016, the
acquisition was completed.

P&G used the cash proceeds to recapitalize Duracell.

The net cost of acquisition was 3 million dollars for
Berkshire.

Berkshire exchanged 52 million shares held in P&G (worth

4.7 million dollars) and 1.8 million dollars cash for full
ownership of Duracell.

Hathaway acquired Duracell through a “split off”.

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On November 14, 2014, Berkshire Hathaway stated its desire to buy
DURACELL from P&G in an all stock deal.

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 WERE THE TWO SIDES CONTENT?

 “I have always been impressed by Duracell, as a consumer and as a long-term investor in P&G
and Gillette,” commented Warren Buffett, Berkshire’s chief executive. “Duracell is a leading
global brand with top quality products, and it will fit well within Berkshire Hathaway .”

 P&G President and Chief Executive Officer, David Taylor, commented: “Duracell is a strong, global
business with a great future ahead of it as part of the Berkshire Hathaway family. We thank
Duracell’s employees for their many contributions to P&G and wish them continued success for the
future.”

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 WHAT IS A SPILT-OFF?

 A split-off is a form of corporate reorganization in which a parent company divests a business unit or
subsidiary.
 In a split-off, the parent company gives shareholders the option of either keeping their existing shares or
trading them for divesting company shares.
 Post the split-off, the subsidiary becomes a separate legal entity owned by some of the parent
organization's shareholders.
 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”.

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 Benefits
BENEFITS FOR BERKSHIRE HATHAWAY

BUFFET’S INVESTMENT PHILOSOPHY

$
Buffet’s known for investing in underperforming
businesses and turning them around. Duracell fit
well into Buffet’s portfolio. Duracell sales had
$
been declining for some time then but Buffet saw
predictability and competitive strength in it.

01 02 03

TAX BENEFIT
FAIR PRICE TAG
Had Berkshire sold its stake in P&G in the open market,
it would have had to pay taxes worth 1 billion dollars on At that time, Duracell was trading at an

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the capital gains. By trading the P&G stock and some EBITDA multiple of 7 while its rival Energizer
cash for Duracell, Berkshire was able to avoid these Holdings was trading at EBITDA multiple of 10.
taxes. Hence, Berkshire Hathaway profited by
acquiring Duracell at a cheaper price than its
rival.

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 WARREN BUFFET PHILOSOPHY
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.
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It includes if they've
historically reinvested profits
back into the company, or if
they've redistributed funds to
back shareholders in the form
of dividends.
Management Tenets
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
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,.
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Value Tenets
12
 Benefits
BENEFITS FOR PROCTOR AND GAMBLE

FOCUS ON CORE BUSINESSES

In August 2014, P&G had announced that it

$
would trim its portfolio down by selling half of its
global brands that were not deemed critical to the
company's future, like Duracell. Duracell’s sales
had been declining and its long-term growth
prospects were not too promising for P&G. The
deal helped P&G get rid off Duracell.

01 02 03

TAX BENEFIT
VALUE FOR THE SHAREHOLDERS
The split off fulfilled all the requirements under Section
The deal created value for the shareholders by
355 of the US Internal Revenue Code. Consequently, the

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reducing the number of outstanding shares and
deal became tax free for P&G. increasing EPS in the short term by way of the
split off and aimed to increase P&G’s share
price in the long term via P&G’s streamlining
strategy.

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 IMPACT: PROCTER & GAMBLE
2018 2017 2016 2015
NET SALES $66.8 $65.1 $65.3 $70.7
OPERATING  Reduction in cost of goods sold,
$13.7 $14.0 $13.4 $11.0
INCOME marketing expenditure by $100 million
NET EARNINGS $9.8 $15.3 $10.5 $7.0 and improvement in profit per employee
(ATTRIBUTABLE TO
P&G) by 45%.
NET EARNINGS
(MARGIN FROM
$14.8 $15.7 $15.4 $11.7
CONTINUING  3% surge in sales of June 2018
OPERATIONS)
(earnings $9.750 billion).
DILUTED NET
EARNINGS PER
$3.67 $3.69 $3.49 $2.84
SHARE FROM  Annual revenue of 2018 was $66.832
CONTUINING
OPERATIONS billion, an increase of 2.7%.
DILUTED NET $3.67 $5.59 $3.69 $2.44
EARNINGS PER  Increase in share value thereby

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COMMON SHARE
benefitting the shareholders.
OPERATING $14.9 $12.8 $14.0 $15.4
CASH FLOW

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 IMPACT: DURACELL
 Sales rose by 6%(i.e.$1billion)
from third quarter of 2016 , leaving Financial performance of Duracell from 2016-17(in 1000
behind its major rivals.
British pounds)

 Sold alkaline batteries on digital

platform like Amazon, which it
couldn’t do earlier due to budget 100238.6
Turnover
constraints in P&G. 81911.4

44219.6
Gross profit
 Duracell’s Coppertop and 31721.9
Quantum batteries hit highest sales
6350.8
with combined market share of Profit for the year
1556.5
50%.
0 20000 40000 60000 80000 100000 120000

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 In 2017, Duracell’s turnover was 2016 2017
100.2 million pounds which was $2
billion earlier.

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 DIVESTITURE STRATEGIES

TYPES

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SPLIT- OFF SPIN-OFF CARVE OUT

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 SPIN-OFF
In a spin-off, the parent company
distributes new shares of a
subsidiary to its existing
shareholders on a pro rata basis,
creating a separate legal entity
with its own management and
board of directors.
There is no cash inflow to the
parent company in a spin-off.
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CARVE-OUT
A carve out is a partial divestiture
of a business unit where the parent
company sells a subsidiary’s
minority portion to outside
shareholders by launching an IPO
while maintaining a majority
stake.
It enables cash inflow to the parent
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company.
CONCLUSION – WHY A SPLIT-OFF OVER SPIN-OFF OR CARVE-OUT?

Under a spin-off, Berkshire wouldn’t have been able to get full ownership of Duracell as the new shares
1 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.

P&G wanted to reduce the number of its outstanding shares and increase EPS for its shareholders.
2 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%
3 of its voting interest in the subsidiary through the IPO while P&G’s intent was to divest 100%
interest in Duracell.

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4 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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WAY AHEAD

DURACELL
ACQUIRING GILLETE ACQUIRED
EVEREADY BY P AND G

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DURACELL DURACELL
ACQUIRED BY ACQUISITION BY
BERKSHIRE GILLETE
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HATHWAY 19