Berkshire Hathaway to Swap Holdings in P&G for Duracell

Warren Buffett, CEO of Berkshire Hathaway Inc. (BRK.B), announced his plans for buying Duracell of Procter & Gamble Co. (PG).

The deal, valued at $4.7 billion, will see a stock swap wherein the equity investments of Buffett in the stock of P&G will be exchanged for one of its operating business.

P&G will capitalize Duracell with $1.7 billion in cash before the closure of the deal, and therefore the net cost to Berkshire Hathaway will be $3 billion.

The deal is slated to close in second half of next year pending regulatory approvals.

Buffett, who has held equity investments in P&G since 2005, has been trimming its holding after the company started wavering under its under previous CEO, Bob McDonald.

The acquisition of Duracell befits Buffett's style of procuring easy-to-understand businesses. According to the billionaire value investor, “Duracell is a leading global brand with top quality products, and it will fit well within Berkshire Hathaway.”

All investment moves by Buffett are closely tracked by the investment community. The announcement of this deal has also left investors to examine all the angles to find out the long-term strategic value of this business, which has been on a decline of late and has been dragging down the overall growth of P&G. Since Duracell mainly produces one-time disposable batteries, its long-term growth is doubted as consumers are increasingly using chargeable batteries.

Nevertheless, demand for disposable batteries is still present for TV remotes and electronic toys. Moreover, Duracell has been developing lithium-ion batteries for some time and there will be growth opportunities ahead if Duracell can enter the market for large batteries used in vehicles and on the power grid.

Also, the deal gives Buffett capital gains and tax benefits since his equity holding will be swapped for a business. If the investments were sold, Buffett would have to incur long-term capital gains tax. Moreover, with P&G shares trending at an all-time high, Buffett found it the best opportunity to swipe off all his holdings in P&G that he had been trying to reduce in tranches since long.

Berkshire Hathaway carries a Zacks Rank # 2 (Buy)

Other players worth considering include, AmTrust Financial Services Inc. (AFSI), Donegal Group Inc. (DGICA) and Arch Capital Group Ltd. (ACGL). All these stocks carry Zacks Rank # 1 (Strong Buy).