Warren Buffett made $600 million and more than $4 billion betting on Gillette. He then turned his stake in the shaving expert into Duracell. This is the story of how Warren Buffett’s razor wager led him to buy the battery manufacturer.
Place your bets on the blades
In 1989, Buffett’s Berkshire Hathaway conglomerate bought $600 million worth of Gillette preferred stock. These shares were paid an 8.75% dividend and had to be redeemed within 10 years. They could also be converted into common shares at $50 per share. Buffett was also a member of the board for the personal-care business.
In his 1989 letter, he stated that Gillette’s business was very similar to the type he likes.
Gillette called Buffett’s preferred stock and exchanged it for 12,000,000 common shares in 1990. This represented an 11% stake in Buffett. It was a quick investment that paid off. Along with Coca-Cola it accounted to nearly $1.5 Billion of the $2.1 Billion increase in Berkshire’s net assets in 1991.
Buffett stated in his letter that “Coca-Cola & Gillette are two the most successful companies in the world and we expect their earnings growth to be hefty in the years ahead.”
Buffett praised Gillette’s dominance, noting that it controlled a 60% market share. Berkshire’s share of the company gave it a 7% slice of the global razor-and-blade revenue, he explained to investors one year later.
The investor spoke highly of Gillette and Coca-Cola, stating that their brands, attributes and products and the strength and stability of their distribution systems gave them a huge competitive advantage.
In his 1995 letter, Buffett acknowledged that he was “far too smart” to have bought Gillette’s preferred stock rather than common stock. Berkshire would have been $555million richer if he had kept it simple. His stake would have been worth $625 million more, with only $70 million in dividends.
Buffett’s praise for Gillette reached its peak when he called it “The Inevitables” and referred to it in 1996. He stated that “No sensible observer — even those of these companies’ most aggressive competitors, assuming they are honestally assessing the matter — doubts that Coke or Gillette will be dominant in their fields worldwide for a lifetime investment.”
He also explained why he prefers established, reliable companies over technology startups and smaller industrial businesses. He stated, “I’d rather be sure of a good outcome than hoping for a great one.”
Buffett’s Gillette stake grew in value to $4.8 Billion in 1997. At Berkshire’s annual shareholder meetings that year, he explored why he liked the company. He claimed that Gillette benefits people as they move up the “comfort ladder”, in shaving, and that they are unlikely to fall one rung.
He said, “If the difference in having great shaves and so-so ones, with lots of nicks, scratches and all, is 10 or $12 per year, that isn’t going to cause many people change their habits.”
Berkshire Chief also mentioned that Gillette’s Sensor razor had increased the market.
Buffett stated, “I wouldn’t have thought that would work so well.” “Before that all the women used disposables, or their boyfriend’s razor. They’re thankful that they have gotten over it.
Buffett brought up the topic again at the 1998 meeting. He said, “It’s a plus to possess products like Gillette or Coke that travel extraordinarily well around world — people want those products.”
He said, “No one is going to find a better way than these two companies in their respective industries.” “They sell a cheap product, so all that’s going to our advantage.”
Buffett said that people upgrade to Gillette products as they have more disposable income. This allows them to enjoy a more pleasant shaving experience.
Gillette’s brand power was also highlighted by the investor. He said that everyone knows the company’s business model and how much they can make copying it. However, no one has been able to replicate it and take its top spot in global razor-and blade sales.
Swapping shavers with batteries
Procter & Gamble bought Gillette in 2005 due to its exceptional performance. Berkshire was awarded 0.975 P&G shares per Gillette share — a total of $4.3 billion at the close of 2004. To increase its holding of 100m shares or a 3% share in the packaged-goods company, Berkshire also bought additional P&G stock. It spent $940 million on the position, which was worth $5.8billion at the close of 2005.
Buffett and his team reduced their P&G stakes in 2008 and 2009. They wanted more cash to finance their investments in Goldman Sachs and General Electric during the financial crisis.
The next move of the investor was to buy Duracell in 2014. The battery business had been acquired by Gillette in the late 1990s. It was now owned by P&G.
Buffett traded his P&G stock worth $4.7 billion and Duracell cash worth $1.8 billion for Duracell. He avoided capital gains tax by the deal. Berkshire also got another operating business. Buffett prefers a portfolio holding.
Duracell was in financial trouble when Berkshire purchased it. It has taken a lot of time and money to get it back on track. Buffett was still on the Gillette board when Duracell was bought by Berkshire and has seen what it can achieve when managed properly, he stated at Berkshire’s 2018 meeting.
He said that Duracell should be making more money than it does now and would be in the future. It’s on the right track.
Buffett has no regrets over trading his P&G stock to get the company. He said, “I love the Duracell deal absolutely equally as when we made them.”
Berkshire still holds approximately 315,000 shares of P&G — a stake that was worth $44million at the time. Buffett still owns a piece Gillette, and is likely to look back fondly at how he transformed a bet on Gillette into another multibillion dollar business for his collection.