Energizer Holdings, Inc. (ENR)

[Enterprising Investor]

Buffett's battery deal could fire up this company's stock (1/12/15)

Thanks to Warren Buffett, 2015 may be the year when shares of Energizer Holdings really light up.

The billionaire investor surprised Wall Street last November when his Berkshire Hathaway agreed to buy Duracell from parent Procter & Gamble, swapping his $4.7 billion stake in the consumer products giant for the entire battery division.

The deal was probably a relief for P&G, which is keen to focus on faster-growing businesses. Battery sales have been in a slump for the last several years as consumers use more products with built-in, rechargeable power sources.

But the deal may actually mean more to Energizer investors. First, the transaction put a decent valuation on Duracell's business. Adjusted for the cash that P&G will put into the company, the deal valued Duracell at about seven times trailing earnings before interest, taxes, depreciation and amortization. That should provide something of a floor for the business despite its recent challenges.

The benefits don't end there. Energizer will probably be happy to see Duracell change hands because Buffett will run the business in a different way when he takes over in the second half of 2015. Under P&G, Duracell has fought aggressively for market share, making the business tougher for rivals like Energizer.

Indeed, Duracell's market share has risen to 35 percent from 27 percent since 2009, according to RBC Capital Markets analyst Nik Modi. He added that Duracell hasn't followed Energizer or Rayovac on price increases during that time.

Modi points out that Duracell has sacrificed significant profits while under the ownership of P&G: The division has an operating margin of 18 percent—lower than when it became part of P&G in 2004 or even when Gillette bought Duracell in 1996. P&G declined to comment.

Buffett, however, is more likely to focus on cash flow. At least one other Buffett deal shows that he tends to focus on profits over market share: Since Buffett acquired condiment giant Heinz with 3G Capital, the company has reduced promotions, Modi said. Berkshire Hathaway didn't respond to a request for comment from CNBC.

Perhaps even more exciting for Energizer investors is the potential for a strategic buyer to scoop up the company's personal care business. That division, whose biggest brand is Schick razors, will become a separate company through a spinoff planned later in the year ending in September 2015.

Of course, spinoffs don't always work out and can indeed be risky moves. As separate companies, Energizer and the personal care business will arguably be less efficient since they won't be able to share certain overhead expenses.

But there's good reason to believe Schick will soon wind up in the hands of a strategic buyer. The razor market is dominated by just two brands, with P&G's Gillette controlling 66 percent of the global share in 2013 and Schick at 18 percent, according to data provider Euromonitor.

That's an appealing dynamic for a potential acquirer of Schick because there's really only one other rival to worry about. And Schick is virtually nonexistent in some of the world's biggest razor markets across Latin America. That creates an opportunity for a big player that already has distribution all over the world to expand the Schick business.

Who might want to own Schick? There's a range of global companies that might consider Schick a good fit. Colgate-Palmolive, for instance, has a major presence in South America. Putting razors on drugstore shelves next to its toothpaste would be a reasonable strategy. Colgate didn't respond to a request for comment from CNBC.

Similarly, Unilever is a big player in South America and appears to be focused more on personal care as it shifts away from food products. The company sold its Ragu and Bertolli pasta sauce businesses in 2014 for $2.15 billion. Unilever told CNBC it doesn't comment on speculation.

Importantly, a deal will make much more sense to Energizer shareholders once Schick becomes part of a separate company. Until now, any deal to sell Schick and the rest of the personal care business would likely have triggered a huge tax bill. But once Schick is part of a separate personal care company, the company can be sold almost immediately without triggering taxes.

There are some limitations. M&A lawyers tell CNBC that an acquirer can buy the spinoff company right away—but only so long as the acquirer never had "substantial negotiations" with Energizer beforehand. But such potential acquirers were likely mindful of that restriction and avoided such talks.

Until very recently, it's been tough to get excited about Energizer. Analysts expect the company to generate $878 million of EBITDA in the year ending in September—a slight decline from both of the prior two years. The stock still looks reasonably priced at about 10.5 times this fiscal year's EBITDA. But with the spinoff and Duracell deal on the calendar, Energizer shares may soon be on the move.

http://www.cnbc.com/id/102329871