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Why did Warren Buffett buy Duracell? Berkshire Hathaway (NYSE:BRK) announced in November 2014 that Berkshire will buy global battery manufacturer Duracell from Procter and Gamble (NYSE:PG) in exchange for the $4.7 billion of P&G shares held by Berkshire.

On the surface, this seems like a fair valuation for a stabilized company with limited growth prospects. Berkshire’s $4.7 billion price tag is equivalent to 10-11x 2014 EBITDA.

If we dig deeper, however, we see that this deal makes enormous sense for Berkshire shareholders financially. We need to make two adjustments to the $4.7 billion price tag:

  1. As part of the transaction, P&G will recapitalise Duracell with $1.8 billion in cash – this implies that Berkshire’s net price is really $4.7 billion less $1.8 billion or $2.9 billion
  2. Berkshire has a large deferred tax liability relating to its stake in P&G. With a cost basis on only $336 million, at a $4.7 billion valuation Berkshire’s deferred tax liability on just the P&G stake is roughly 35% * ($4.7 billion – $336 million) = $1.5 billion. Such a trade will effectively remove the deferred tax liability from Berkshire’s books, increasing net asset value by $1.5 billion

If we make both adjustments to the $4.7 billion headline number, Warren Buffett’s purchase price for Duracell is really closer to $4.7 billion – $1.8 billion – $1.5 billion = $1.4 billion (or only 3-4x EBITDA!!). Warren Buffett got Duracell at a steal.

Duracell is also a wide-moat business with significant brand value. According to P&G’s annual report, Duracell maintains an impressive 25% market share in the global battery market. This is not an easy industry to get into given the economies of scale needed to operate profitably. It is also relatively stable, albeit potentially in decline given the advent of rechargeable electronic devices. There is some uncertainty as to the future prospects of the industry, but at least Berkshire shareholders only need 3-4 years to get their money back.

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Imagine working 5 days a week even when you are 107, almost 40 years past most people’s retirement age. That is Irving Kahn, the value investor and stock picker who works not because he has to but because he loves his work so much.

This is quite akin to Warren Buffett, who often says he ‘tap dances’ to work everyday. It is no coincidence that both have built very impressive investment track records over time.

As Charlie Munger quips in his USC Law School Commencement Address, you need to have an ‘intense interest’ in a particular subject if you want to excel in it. Success and mastery in investing requires an intense interest and willingness to spend your entire life learning as much as you can, particularly about businesses and competitive dynamics.

Irving Kahn was also a student of Benjamin Graham – one of the few investors still alive today who worked directly for this legendary father of value investing. Graham taught the ‘net-net’ approach to investing and employed a statistical approach to fish out bargains in the stock market. Irving Kahn and Warren Buffett both started out with the Graham approach when they first started investing.

Read more in Jason Zweig’s WSJ column here: The Intelligent Investor: Irving Kahn The 107-Year-Old Stock Picker.

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Invert, always Invert

One of Charlie Munger’s favorite pieces of advice is to invert, always invert. He once told a large crowd that he wants to know where he will die, so he will never go there. On a more practical note, inverting is very useful in just about every facet of life, including investing. The following WSJ [...]

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Came across a great article today on a talented young investor who decided to follow in Buffett’s footsteps and started reading his annual shareholder letters from the age of 12. What is interesting though is how he transitioned to being an activist investor: when he felt helpless as a few investments tanked in spite of [...]

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Warren Buffett PetroChina Investment (NYSE: PTR)

Warren Buffett PetroChina Investment (NYSE: PTR). Buffett invested $488 million in PetroChina and made close to 9x his investment in 5 years. The principles of value investing do not just work in the United States; they work anywhere there are markets where there is a Mr. Market who tosses irrational prices at you every day. [...]

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Warren Buffett Johns Manville Investment. Why Warren Buffett invested in Johns Manville at 5x EBIT, at an opportune time when Johns Manville was out of favor on Wall Street. Buffett acquired Johns Manville for $1.8 billion in 2000. Johns Manville is America’s biggest manufacturer of fiber glass building insulation, commercial roofing membranes and roof insulations, [...]

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Warren Buffett Justin Industries Investment

Warren Buffett Justin Industries Investment. Why Warren Buffett invested in Justin Industries, a producer of bricks and boots based in Texas. Buffett acquired Justin Industries for $570 million in cash in 2000. Justin Industries is the leading maker of Western boots and a premier brick producer in Texas and five neighboring states. Buffett liked this [...]

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