Analysts Weigh In On Berkshire's Duracell Deal With P&G

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Analysts from multiple research firms have issued reports about Procter & Gamble Co (NYSE:PG) exchanging a recapitalized Duracell in exchange for Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s holdings of P&G stock.

Last week, Warren Buffet’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) said that it had reached a definitive agreement with Procter & Gamble Co (NYSE:PG) to acquire its Duracell battery business.

GS neutral on Procter & Gamble

In a deal unveiled last week, Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) has agreed to buy Duracell battery business from Procter & Gamble Co (NYSE:PG). As part of the agreement, in exchange for a recapitalized Duracell, which will include approximately $1.7 billion in cash at closing, Procter & Gamble will receive shares of P&G’s common stock currently held by Berkshire Hathaway having a current value of approximately $4.7 billion.

Jason English and team at Goldman Sachs point out that Procter & Gamble Co (NYSE:PG) injecting $1.8 billion of cash into the new entity in exchange for $4.7 billion of P&G stock would effectively involve buy-back of 1.8% of shares. The analysts note the proposed tax-free transaction values the business at 7x 2014 EBITDA, which is the equivalent of 9x after tax. The Goldman Sachs analysts believe P&G will restate Duracell to discontinue operations, resulting in a restatement of 2014 EPS to $4.08 to $4.10, from $4.22. Though the management reiterated their FY 15 EPS growth guidance, the analysts note with the now lower base, it would imply FY15 EPS of $4.24 to $4.35 from an original range of $4.39 to $4.47.

Jason English et al highlight that Duracell has been a low growth and limited profitability business to Procter & Gamble Co (NYSE:PG). The analysts note while P&G anticipates FY 15 to move lower, this should be offset in FY16, once the lower share count associated with the deal financing takes effect. The GS analysts assigned “Neutral” rating on P&G and pegged its 12-month price target at $85 based on equal weighted P/E of 1x and EV/EBITDA of 12x.

Berkshire’s Duracell deal not good sign for P&G – Bernstein

Ali Dibadji and Ian J. Gordon of BersteinResearch in their research note dated November 13, 2014 point out that though they consider the valuation received and the strategy to divest non-core assets as positive for Procter & Gamble Co (NYSE:PG), they have one major concern viz.: Buffet would rather own Duracell than P&G, which is not a good sign for P&G. The Bernstein analysts have assigned “Outperform” on P&G with a target price of $93.

John Faucher and colleagues at JPMorgan in their research report dated November 13, 2014 points out that the last week’s deal values Duracell at 7x FY 14 EBITDA, which is likely at the low-end of expectations. The analysts assume Procter & Gamble Co (NYSE:PG)’s organic top line is up nearly 3% in FY 15, which will require acceleration through the year.

John Faucher et all believe that consistent delivery of gross margin expansion, in combination with better top-line growth, will facilitate Procter & Gamble Co (NYSE:PG) in closing the current valuation gap with peers. The JPM analysts have assigned an “Overweight” rating on Procter & Gamble.

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