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DuPont considering alternatives to spin-off

3:11 PM MDT | May 26, 2014 | —Lindsay Frost

Fanandakis: The value must be worth the risk.

DuPont CFO Nicholas Fanandakis said during an investor conference on 21 May that the company would consider a Reverse Morris Trust (RMT) transaction or outright sale of its performance chemicals business. The company announced last October that it would divest its $7-billion/year performance chemicals segment by mid-2015 through a tax-free spin-off to shareholders as a part of the company’s transformation to a “higher growth, less cyclical company.” The business includes titanium dioxide (TiO 2), fluoroproducts, and industrial chemicals.

“We are open to the possibility of someone coming in with a potential RMT [transaction] or even a sale,” Fanandakis says. “I believe there are hurdles in those options that are sufficient [so] that it is going to be difficult for someone to offer a value that would make me excited from a preceding standpoint. But, that opportunity exists and is there. It has got to be of sufficient value though to offset the risk and the uncertainty that we would take in moving forward with that endeavor versus continuing down the spin path.”

An RMT deal would have the tax advantages of a spin-off but introduce some uncertainty around timing and other factors, Fanadakis says. “If I am going to take a risk that is going to delay the mid-2015 timeline, it’s got to create enough value on the other side for me to take that risk.” The most significant hurdle to an outright sale, meanwhile, is the tax impact because of the low-cost basis of the assets, he says. “But, there are ways to address that. There are remedies that could be put in place to deal with that,” he adds.

Alembic Global Advisors firm advisor Hassan Ahmed says that an RMT with TiO 2 producer Tronox would make the most sense. “We have consistently made the case that such a transaction with Tronox could be a win-win for both companies, as it would allow an optimal monetization of Tronox’s ballooning net operating losses.”

“If you look at the ability to leverage science into those [performance chemicals] businesses, it was limited versus other places within DuPont,” Fanandakis says. “So, I think we are certainly executing well against the strategic direction we are going and feel very good about the active portfolio management that we have been able to do.”

PPG Industries last year divested its commodity chemicals through a spin-off and then immediately merged the business with Georgia Gulf in a RMT transaction. The merger resulted in PPG shareholders receiving approximately 50.5% of the shares of the merged company and existing Georgia Gulf shareholders owning approximately 49.5%. PPG also received $900 million in cash. The combined business now operates as Axiall.

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