Allan Sloan, finance watcher, chose to analyze the pending Duracell/Procter & Gamble deal with Berkshire Hathaway for the Washington Post. He mentions that it uses a once minor loophole in taxes known as the “cash-rich split off” that has become large enough to make Sloan “sit up and pay attention.”
Sloan makes an estimate saying that Berkshire Hathaway’s going to save $1.66 billion in federal income taxes by going through with the plan to exchange P&G stock for the company’s Duracell division, instead of just purchasing the company after selling the stock. The tax code allows it, according to Sloan, as long as it closely follows the rules.
In November 2014, when Berkshire Hathaway first announced the $3 billion transaction, CEO and Chairman Warren Buffett had said, “I have always been impressed by Duracell, as a consumer and as a long-term investor in P&G and Gillette. Duracell is a leading global brand with top-quality products, and it will fit well within Berkshire Hathaway.”
Sloan wrote that a very similar but potentially larger deal involving Alibaba – a Chinese Web company –and Yahoo would end up saving about $5.7 billion in taxes. The lost tax revenue will need to be made up by regular taxpayers.
In his piece he wrote that Congress should close this loophole because it’s “threatening to go mainstream and suck billions of dollars out of our collective pockets.”
“It’s probably too late for the tax code change I suggested to stop the Berkshire – P&G transaction, because it has been announced,” wrote Sloan. “But it’s not too late to stop a possible Yahoo – Alibaba deal or others that might emerge now that cash-rich split offs are getting high profiles and Buffett’s imprimatur.”
In the meantime, a publication in the industry called Chain Drug Review has estimated that Duracell has about one quarter of the battery global market share, with US drugstore sales of alkaline batteries running about $375 million per year.
Duracell’s competitor Energizer Holdings Inc. has plans to divide its company into two divisions, with a household products division that include lighting products, batteries, etc. and a personal care division with the Wilkinson Sword and Schick brands, by July 1 of this year.