November 14, 2014 Comments

On Thursday, the S&P 500 was about unchanged while Toronto fell 0.5% on lower oil prices.

After the close Melcor announced that it would sell $138 million worth of its rental buildings to its 47% owned REIT. It appears that $45 million will be paid through issuance of REIT units to Melcor which will increase its ownership of the REIT to 56%. Fundamentally not a whole lot is happening here since property already carried at market value is being sold to an entity which Melcor owns about half of for market value. If the market views this as favorable to the REIT and its growth then the REIT units might rise which would in turn pull the Melcor shares up. If nothing else this news may bring Melcor to the attention of investors which should be positive for its price.

Berkshire Hathaway announced this morning a small to medium acquisition. It will buy the Duracell battery brand from Proctor and Gamble for $3 billion. It’s an odd deal in that Berkshire will pay for it by trading essentially all of the shares it owns in Proctor and Gamble. To make things even out Proctor and Gamble has to throw in $1.7 billion in cash. This is really not a large acquisition for Berkshire which has $517 billion in assets.

Buffett / Berkshire has held P&G shares for many years. The shares were acquired when P&G bought Gillette which Berkshire had previously owned for quite a few years. In recent times P&G had come in for some criticism and as I recall Buffett had been mildly critical. Buffett was sitting on HUGE capital gains on these P&G shares and would have faced hundreds of millions in income tax if he simply sold the shares. So this acquisition allows him to trade the P&G shares for Duracell and likely will not generate any capital gains taxes.

I had been surprised over the years to hear that Duracell was a money loser or at least not a big profit maker. When you look at the price of batteries and consider manufacturing efficiencies, I would have though they would be a high profit item. Also Duracell is a strong brand name. To me, this looks like a good fit. Buffett gets yet another brand name business. And he will set it up so that he president of it or top manager will have big incentives to minimize the capital invested and maximize profits. Berkshire will make sure that Duracell has all the money it needs to invest appropriately and to advertise. Any excess cash flow will go straight to Buffett to invest elsewhere. Duracell will be relieved of certain head-office related costs and will likely have a reduced burden of reporting. Buffett will want all the details on weekly sales but they won’t likely have to spend time preparing budgets and strategic plans or Board presentations for Buffett since he is not a big believer in such things.

For Proctor and Gamble this is basically a massive stock buyback funded partly with cash and partly with its Duracell unit.

Berkshire (B) shares are up 23% this year to $146. Buffett has crushed the likes of Doug Kass who was stupid enough to short Berkshire shares in the Spring of 2013 at prices from about $90 to $110 who and even got invited to speak his silly views at the 2013 annual meeting. It would be one thing to simply choose not to own Berkshire. That is perfectly valid. But to short the company was just stupid.

Liquor Stores N.A. released earnings after the close. While the same store sales growth was good at 3%, profits are down somewhat compared to last year. As noted previously, I basically gave up on this company. I used to think it could be a good growth and industry consolidation story with scale advantages but I basically lost faith in management.

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