"You're walking around blind without a cane, pal. A fool and his money are lucky enough to get together in the first place."
--Gordon Gekko (Wall Street)
This morning it was announced that Procter & Gamble will sell its Duracell subsidiary to Warren Buffett's Berkshire Hathaway. The terms of the deal have PG injecting $1.8 billion in cash into Duracell, and then BRK trading its PG stock position currently valued at $4.7 billion for Duracell.
Suppose that PG shares are overvalued and that their intrinsic value is half the current price. If true, then Buffet is paying with currency that is actually worth $2.35 billion. Moreover, PG kicks in $1.8 billion in cash--cash that is on margin via corporate borrowing.
As such, Buffet surrenders about $500 million ($4.7 - 2.35 - 1.8 billion) in real value for Duracell. PG shareholders get a pile of overvalued shares, and they have fewer productive assets with which to create future value (part of which would go to servicing the debt used to fund the cash surrendered in the Duracell transaction).
The better deal appears to belong to which side?
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1 comment:
Berkshire Hathaway cost basis in P&G was ~$336 Million as reported in 2013 Annual Report
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