This morning, Warren Buffett's Berkshire Hathaway (BRK.A) , (BRK.B) announced that it was buying the Duracell battery business from Procter and Gamble (PG) in a deal valued at $3 billion. Everything about the deal is a classic Warren Buffett investment.
Last month, P&G announced that it wanted to divest itself of the Duracell business. Becoming a smaller, more-focused consumer products company is the new plan at P&G and shedding non-core businesses is a key objective of management.
The deal, as is often the case, was structured brilliantly. Instead of cash, Buffett is paying for the deal using P&G stock that Berkshire has owned for years. The shares in P&G that Berkshire is handing over are worth about $4.7 billion. Duracell will come to Berkshire with $1.7 billion in cash that P&G will contribute before the deal closes.
Investors are going to have a field day with this one.
With Procter and Gamble shares trading at 52-week high, is Buffett using this deal to cash out at the top? This deal has given Berkshire a way to dispose of $5 billion in stock without disrupting the share price. I would also suspect that there are some favorable tax implications in doing an equity-for-business swap like this.
On the other hand, Procter and Gamble is basically buying back $4.7 billion in equity in one fell swoop, which could be a sign that management thinks its shares are undervalued.