Berkshire Hathaway Inc. agreed to buy the Duracell battery business from Procter & Gamble Co. in a stock swap as Chairman Warren Buffett narrows his company’s equity portfolio and extends a bet on operating businesses.

Berkshire will turn over $4.7 billion of P&G shares held by Buffett’s Omaha, Nebraska-based company, according to a statement today. Duracell will have about $1.7 billion in cash when the deal is completed, which is expected in the second half of next year, according to the statement.

The exchange may help Berkshire reduce most or all of its stake in Cincinnati-based P&G without incurring the tax costs of selling shares for cash. Berkshire held more than 100 million P&G shares as recently as 2008 and cut the holding several times since then as the consumer-goods company faltered under previous Chief Executive Officer Bob McDonald. Berkshire’s stake is valued at about $4.7 billion, according to data compiled by Bloomberg.

“It’s a brilliant financial deal,” Buffett biographer Andrew Kilpatrick said in a phone interview. “He’s getting a tremendous deal, tax-wise.”

P&G, the world’s largest consumer-products company, announced last month that it would divest Duracell. CEO A.G. Lafley has been streamlining the company, cutting expenses and selling non-core businesses. P&G sold its pet-food business and has said it will jettison as many as 100 of its slower-selling brands.

Paying with shares would mirror two of Buffett’s transactions in the past year, when he swapped stock that had appreciated for operating businesses. He handed over a holding in Phillips 66 in February in exchange for its pipeline-flow- improver unit. In July, he swapped a stake in former Washington Post publisher, Graham Holdings Co., for cash, a Miami television station andBerkshire stock that Graham held.

P&G plans to recapitalize Duracell with about $1.8 billion of cash before the deal is completed and will take a charge of about 28 cents per share this quarter tied to the battery maker. The company also sold an interest in a China-based battery joint venture.

Duracell accounts for 2.9 percent of P&G’s sales and has a compound annual growth rate of 1 percent, compared with 7 percent for Pampers diapers and 5 percent for Pantene shampoo, according to an August note from Ali Dibadj, an analyst at Sanford C. Bernstein & Co.

“It seems like it is at the right valuation versus our estimates,” Dibadj said today in an e-mail. “However, I do not see it as a particularly good sign that Buffett is trading in his P&G shares for Duracell.”

P&G slipped 1.3 percent to $88.32 in early trading at 8:36 a.m. in New York. Berkshire Class-B shares rose 0.3 percent.

Slimming down P&G will allow proceeds to be invested in developing more products, like the Gillette Fusion ProGlide razor with FlexBall technology, that can command higher prices. Consumer-products companies have been coping with cautious customers, a slowdown in developing markets and higher commodity costs.

“We’re clear-eyed about the challenges we face from external forces, like currencies,” Lafley said in a separate statement. “We will continue to accelerate and increase productivity savings, sharpen our strategies and strengthen our portfolio.”

Buffett had about 52 million P&G shares at the end of last year. The shares cost about $336 million, according to Berkshire’s annual report.

Exiting some long-held equity investments also helps clean the slate for Buffett’s successors. Todd Combs and Ted Weschler were hired in 2010 and 2011 to help oversee part of the company’s investment portfolio and eventually run it all. The portfolio includes multi-billion-dollar holdings in Coca-Cola Co., American Express Co. and Wells Fargo & Co. that Buffett invested in more than a decade ago.

Berkshire became one of P&G’s biggest investors in 2005 when it bought Gillette Co., the razor maker in which Buffett had a stake.

“I have always been impressed by Duracell, as a consumer and as a long-term investor in P&G and Gillette,” Buffett said in Berkshire’s statement.

Jones Day acted as P&G's legal counsel, and Cadwalader Wickersham & Taft advised P&G on the tax aspects of the sale. 

--With assistance from Laura Davison in New York.

Subscribe Now

Complete access to real-time information and analysis of news and trends in the industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.