Buffett Duracell Deal Sets Energizer as Target: Real M&A

Warren Buffett’s purchase of Duracell yesterday may embolden acquirers to go after Energizer Holdings Inc.’s battery unit.

Berkshire Hathaway Inc., headed by Buffett, is swapping its Procter & Gamble Co. stock for Duracell in a deal that values the battery business at about 7 times its profit this year, according to JPMorgan Chase & Co. That sets a base multiple for Energizer’s battery unit, which itself could be a takeover target after the company completes a breakup announced in April, said SunTrust Banks Inc.

“A relatively savvy investor has just bought Duracell,” Stephen Powers, a New York-based analyst at UBS AG said in a phone interview. “Even people who weren’t thinking about Energizer as a target yesterday are probably looking at what Berkshire Hathaway just did and saying, ‘Hmm, maybe I should look at Energizer.’”

Energizer shares rose the most since August yesterday on speculation of a potential deal. Buffett could build out his battery holdings by buying Energizer’s business too, taking advantage of its brand recognition and appeal to value-conscious shoppers, said Deborah Aitken of Bloomberg Intelligence. Or a private-equity firm could follow his blueprint and strike a deal of its own with Energizer’s cash-generating battery unit, according to UBS.

A representative for St. Louis-based Energizer declined to comment. Buffett didn’t respond to a request for comment sent to an assistant.

Today, shares of Energizer declined 2 percent to $125.94.

To take control of Duracell, Buffett will hand over $4.7 billion in P&G shares, about all of Berkshire’s stake in the company, according to data compiled by Bloomberg. Duracell will have about $1.7 billion in cash after the deal closes.

Benchmark Base

The deal values Duracell at 7 times its fiscal 2014 earnings before interest, taxes, depreciation and amortization according to John Faucher of JPMorgan. If the transaction had been done in cash, the multiple would have been about 9.

“We haven’t had a really clean valuation benchmark on a battery business in quite some time,” Powers of UBS said. “This sets that benchmark.”

Energizer, valued at $7.9 billion yesterday, announced in April that it would split into two publicly traded companies. One will be focused on batteries and portable lighting and the other on personal-care products including Schick razors and Hawaiian Tropic sunscreen.

Battery Valuation

As a stand-alone entity, Energizer’s battery business probably doesn’t deserve the same valuation as Duracell because it’s smaller and has been losing U.S. market share, Powers said. Takeover speculation will boost the shares, though, and the household-products division, which is made up mostly of the battery business, could command as much as 9 times Ebitda in an eventual sale, he said. That translates to more than $3 billion, based on his estimates for 2016 profit.

“Post-split, we view that either one or both of the businesses will be seen as potential takeout candidates,” William Chappell, an Atlanta-based analyst at SunTrust, wrote in a report yesterday.

Breakup byproducts are more digestible and more likely to become takeover targets. With more than 200 spinoffs announced this year, the pieces of multi-billion companies from Hewlett-Packard Co. to EBay Inc. are becoming acquisition bait.

Buffett on Batteries

Buffett’s takeover of Duracell could be just the start of his battery business dreams. He may eye Energizer’s division as well, said Aitken of Bloomberg Intelligence. The billionaire could, as an example, use one business to expand in emerging markets and the other to target innovation, she said.

“You focus the message of your products into different areas rather than making them directly competitive,” she said in a phone interview. Energizer has “got some decent brands and a lot of brands that are in the value area, which is where the growth is. I could imagine that they would come together.”

One hurdle could be antitrust regulators, as Energizer and Duracell are among the top battery manufacturers.

Buyout firms may look at Buffett’s attempt to turn around a slow-growth battery business with stable cash flow as a strategy worth copying. Energizer’s free cash flow has been climbing the past few years, data compiled by Bloomberg show.

“If he’s gone through there and taken one brand over, why wouldn’t another private-equity firm think they could do just as well with another very strong brand?” Aitken said.

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