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DuPont exploring sale or split of performance chemicals unit
4:13 PM MDT | July 26, 2013 | —Michael Ravenscroft and Robert Westervelt
DuPont announced 23 July that it is exploring the sale or spin-off of its $7-billion/year performance chemicals unit as part of its transformation to a “higher growth, less cyclical company.” DuPont’s performance chemicals business includes titanium dioxide (TiO2), fluorochemicals, and specialty and industrial chemicals (chart). The business posted 2012 segment sales of $7.2 billion, roughly 20% of DuPont’s total net sales, and pretax operating income (PTOI) of $1.6 billion, 33% of DuPont’s total PTOI last year. DuPont announced the planned sale along with its second-quarter earnings report. The company posted second-quarter net income of $1.03 billion, down 12% year-on-year (YOY). Net sales were $9.8 billion, down 1% YOY, principally reflecting lower TiO2 pricing, DuPont says (see earnings story).
“We have been carefully weighing the strong cash generation of our performance chemicals businesses against their cyclicality and lower growth profile, as well as where the power of DuPont’s science can be differentiated,” says DuPont chair and CEO Ellen Kullman. DuPont’s decision to exit performance chemicals follows the sale of its automotive coatings business for $5 billion earlier this year and the $7-billion acquisition of Danisco, in 2011.
“We have been evaluating options for some time that may provide greater shareholder value,” says Nick Fanandakis, DuPont executive v.p. and CFO, tells CW. “It’s progressed to the point where, in order to complete the evaluation, we have to bring others in. Transparency is key as we look to fully understand what options are available. We couldn’t continue to do this under cloak of darkness.”
Fanandakis says DuPont has signed an engagement letter with an investment bank or banks for the process but has not disclosed the advisor.
The sale of performance materials will leave the company focused on agricultural and nutrition, biobased industrials, and advanced materials. DuPont also announced on 23 July that it would realign its leadership team “to accelerate its integrated science execution” in the biobased and advanced materials businesses. James Collins will become senior v.p. responsible for industrial biosciences, performance polymers, and packaging and industrial polymers.
Matthew Trerotola, a former head of DuPont’s nonwovens business, will rejoin the company as senior v.p. managing the protection technologies, building innovations, and sustainable solutions businesses. He will be responsible for driving improved execution and accelerating growth. Trerotola’s previous role was v.p. and group executive/life sciences for Danaher (Washington).
Fanandakis says the remaining advanced materials businesses are a good fit with DuPont’s integrated science strategy. “I believe there is an opportunity to have integrated science and biology cross over into the advanced materials businesses,” Fanandakis says. DuPont says that renewable polymers, including its Sorona polytrimethylene terephthalate business, has become a $100-million business, and that half of its $4-billion/year engineering plastics could be based on renewable feedstocks in the coming years. “We will continue to build on that. And when you look at Jim Collins’s new role in those businesses, it is to accelerate integration between biotechnology and that side of the house.” Electronics also remains a strong fit, given the strong technology and sustainability profile. “When you look at electronics, there is a lot of science,” Fanandakis says. “There is a high rate of new products introduced. And, it is a business that has a high single-digit growth rate; it is not a GDP-growth type business. I see a very distinct difference between electronics and what’s on the [performance] chemicals side.”
Analyst estimates on the enterprise value of the performance chemicals business range from $9 billion to $12 billion. UBS analyst John Roberts says in a report that the “default scenario” would appear to be a spin-off, similar to what DuPont did with Conoco in 1999. “If TiO2 is bottoming, a sale would appear premature,” Roberts says. “A spin- or split-off leaves that decision with investors. That could also explain why fluoroproducts and chemical solutions are being included. More scale and scope allow for less cyclicality, higher leverage, and flexibility in the assignment of [retirement and environmental] liabilities.” A UBS evaluation puts an enterprise value of $11.8 billion on the business, noting a high implied multiple of nine times Ebitda because of the current depressed earnings for the performance chemicals segment.
One week prior to the announcement, on 17 July, DuPont shares soared 5.3% after reports that activist investment firm Trian Fund Management (New York) had acquired a large stake in the company. The investment was first reported by Andrew Ross Sorkin, a reporter with The New York Times and CNBC, at the CNBC–Institutional Investor Delivering Alpha Conference, held at New York. Kullman told Bloomberg last week that Trian was not the impetus of the sale.