Updated from 10:00 a.m. to include additional information regarding financials throughout the story.
NEW YORK (TheStreet) -- Billionaire Warren Buffett just pulled off another elegant deal for the ages.
To acquire Procter & Gamble's (PG) Duracell battery business, Buffett's Berkshire Hathaway (BRK.B) (BRK.A) said Thursday it is paying about $4.7 billion in P&G stock, a roughly 1.9% stake, currently held by the billionaire investor's holding company. That's stock that had been paying a yield of about 2.9%, or roughly $135 million a year.
To convince Buffett that it was worth his money to let go of that yield, P&G will capitalize Duracell with $1.7 billion in cash at the close of the deal.
For Berkshire, the deal allows Buffett to monetize about 99% of his stake in P&G, roughly 52.3 million shares, without incurring the tax expenses of selling those shares back to the market. Additionally, Berkshire acquires a global brand that fits with his stakes in other consumer products such as Coca-Cola (KO) and H.J. Heinz as well as owning See's Candies, Fruit of the Loom, and Geico insurance.
"The deal isn't material to Berkshire, it isn't going to move the needle, but it is an artfully structured deal," Cathy Seifert, an analyst at S&P Capital IQ said in a phone interview from New York. "It's also win-win for both companies as it appears to be a tax-effective sale as well for P&G, and Buffett gets Duracell with a nice capital infusion."
In his return to the company, P&G CEO A.G. Lafley has made streamlining his sprawling company, the world's largest consumer products maker, a central part of his mission. Lafley had already sold Cincinnati-based P&G's pet-food business and other slower-growth items, when he announced last month that the Cincinnati-based company would exit the Duracell battery business.
At the time, P&G observers assumed that exiting the Duracell business meant as a spinoff. But with P&G shares having already risen 9.9% in 2014, the opportunity to unload the shares without paying taxes was too good to pass up for Buffett.
For P&G, the Duracell sale hands P&G shares in the company, a sort-of share buyback, while allowing Lafley to better concentrate on 70 to 80 core brands including Bounty, Gillette, Crest, Pampers and Vicks.
For Buffett, Duracell as a business apparently offered more than what Berkshire was yielding from owning the roughly 52.3 million P&G shares that he'll pay for the battery company, out of the 52.97 million shares Berkshire held in the company at the end of June.
Berkshire's P&G shares were generating approximately $1.35 billion a year, a yield of 2.9% on an annual dividend of $2.57. In short, the transaction allows Berkshire Hathaway to acquire a profitable business and a global brand while avoiding paying taxes and throwing off the same or more cash than the P&G shares.
"Duracell sounds like a good fit for Berkshire -- a great American company, iconic brand, great logos, really fits into the puzzle when you think of the Geico Gecko," said Clifford Gallant, Nomura managing director of equity research, in a phone interview from San Francisco. "As for the transaction, he has enough cash to just buy Duracell but this appears to be an efficient way to exit the P&G position."
Shares of Berkshire Hathaway were gaining 0.4% to $146.15 on news of the deal while P&G was falling 0.4% to $89.14.
Written by Leon Lazaroff in New York
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