Edited November 14, 2014.
We should have known that Warren Buffett (BRK.A, BRK.B) was interested in acquiring Procter & Gamble’s (PG) battery business, Duracell. Today, we found out that he was. In exchange for a recapitalized Duracell Company, including $1.7 billion in cash at closing, Berkshire Hathaway will fork over $4.7 billion worth of Procter & Gamble shares to the former parent to bring Duracell’s operations into Berkshire Hathaway. The transaction is expected to close in the second half of 2015.
We think it’s mostly a win for Procter & Gamble. The company had announced its decision to shed Duracell in its most recent quarterly report, a move we had been heavily in favor of. Based on trading action following the announcement, it’s very likely the Oracle of Omaha paid up to acquire the Duracell brand, but as with any transaction involving Warren Buffett, we wouldn’t expect the deal to be value-creating for Berkshire holders for some time in the future. In any case, Duracell is a fantastic brand, and we think it will fit well with the types of companies typically found within the Berkshire portfolio. Procter & Gamble remains a core holding in the Dividend Growth portfolio.
In other news, Dreamworks (DWA) is garnering interest on news that Hasbro (HAS) is in advanced talks to acquire the firm. Dreamworks creates family entertainment, including animated feature films, television specials and series, live entertainment properties and related consumer products. Its feature films are a substantial source of its revenue. The firm has had a number of big hits in the past (Shrek, Madagascar, Kung Fu Panda), but its feature film segment has had its share of challenges, too. The biggest risk embedded in Dreamworks’ business model is the boom-and-bust nature of the movie industry, in general. The unexpected delay in the release or commercial failure of just one film could hurt results in a big way. Dreamworks, for example, recently took a $57 million hit on Mr. Peabody and Sherman due to box office struggles.
Under the current terms of the proposed deal, Hasbro would pay a mix of cash and stock, though an exact price has not yet been determined, one of the people said. Jeffrey Katzenberg, the chief executive of DreamWorks Animation, is seeking more than $30 a share, a significant premium over his company’s current stock price.
Frankly, we’re a bit nervous over the potential transaction. At $30+ per share, Hasbro would be overpaying for Dreamworks’ assets, which we value at $24 per share on a standalone basis, and synergies would remain difficult to predict given consumer reception of any one film. Hasbro has had some success with Transformers (which it made with Paramount), but it also has had some busts such as Battleship, which was released in 2012. Having access to a stable of well-known brands in the Hasbro portfolio would be lucrative for a Hasbro-Dreamworks combination, but the boom-and-bust risks remain. A few movie flops in a row, for example, could really put a dent in the combined entity’s financial health and dividend growth potential. We’d generally prefer that Hasbro continue to focus on licensing its stable of brands, as opposed to taking on the risk of making the movies itself. The transaction could also put future agreements with Disney (DIS) at risk given potential conflicts of interest.
All told, any immediate cash outflow as in the case of this potential transaction would be net-negative for Hasbro’s dividend. Hasbro remains a holding in the Dividend Growth portfolio, but we’re monitoring developments closely.