DuPont Breakup Seen Falling Flat for Investors: Real M&A

DuPont Co. may be proving that a breakup isn’t always the best answer for boosting a stock price.

The $53 billion company is exploring options for one of its more volatile businesses, which makes titanium dioxide pigment and Teflon coatings. While DuPont says spinning off or selling the unit with $7.2 billion in revenue may boost returns for investors, analysts peg the chemical company’s value in a breakup at $59.25 a share, according to the average of 12 sum-of-the-parts estimates compiled by Bloomberg. That’s only 3.6 percent more than its price before the July 23 announcement.

“Investors see ‘strategic alternatives’ and get very excited, but when you run the numbers, much of the upside is already priced in,” Edward Yang, an analyst at Oppenheimer Holdings Inc. who values DuPont at $62 a share in a split, said in a phone interview. “There’s also some risk to constantly reshuffling the portfolio.”

DuPont, which produces thousands of products such as Kevlar anti-ballistic fiber and genetically modified corn, is weighing a separation of performance chemicals after the unit’s operating profit plunged 56 percent last quarter amid a slump in titanium dioxide prices. Before jumping 5.3 percent July 17 on reports that activist investor Nelson Peltz amassed a stake, DuPont had gained only 30 percent in the last decade, trailing the Dow Jones Industrial Average’s 70 percent increase.

“We are focused on becoming a higher value, higher growth company through our integrated science strategy,” Michael Hanretta, a spokesman for Wilmington, Delaware-based DuPont, said by phone yesterday. “Our review of strategic alternatives for performance chemicals is another important step in that process.”

Activist Peltz

Chief Executive Officer Ellen Kullman said in an interview this week that Peltz wasn’t the impetus for DuPont disclosing its plan, which was being considered for months. Kullman said she hasn’t spoken to Peltz.

Anne Tarbell, a managing director for Peltz’s Trian Fund Management LP, declined to comment. The New York Times’s Andrew Ross Sorkin told a CNBC investing conference last week that Peltz had taken a “very big” stake.

Under Kullman’s leadership since 2009, DuPont has continued to shift away from traditional commodity products toward higher-margin businesses that capitalize on meeting global demand for food, energy and security. DuPont sold its auto-paint unit this year to private-equity firm Carlyle Group LP for $4.9 billion.

Volatile Earnings

Volatile earnings from performance chemicals have been weighing down DuPont’s valuation, said Matt Arnold, a St. Louis-based analyst at Edward Jones & Co. The division makes cyanide, white pigments for paints, Freon refrigerants and Teflon coating for nonstick pans.

The stock initially surged as much as 5.6 percent following DuPont’s July 23 announcement about the performance-chemicals separation, before ending the day down 5 cents. The shares rose 0.5 percent yesterday to $57.38. Today, DuPont added 0.4 percent to $57.59.

DuPont’s enterprise value of $60 billion is about 11 times its trailing 12-month earnings before interest, taxes, depreciation and amortization, which is the median ratio for U.S. chemical makers larger than $10 billion, data compiled by Bloomberg show.

Analysts typically use the multiples that DuPont’s rivals are trading at to help derive the value of each division. A dozen of their sum-of-the-parts estimates show that a breakup may not yield a big return for DuPont shareholders.

Breakup Value

The highest of the estimates comes from Susquehanna International Group LLP at $70 a share and $67 from Deutsche Bank AG, which said in a July 23 note that the divestiture would be a “strong step in the right direction” to becoming a “higher growth, less cyclical company.”

The low end of the range includes Alembic Global Advisors’ $43 and Goldman Sachs Group Inc.’s $50, implying that DuPont’s pieces would be valued at less than yesterday’s closing price if separated.

There’s “not much upside from a split,” Bill Carroll and John Roberts, analysts at UBS AG, wrote in a July 18 report following speculation that Peltz may push for changes at DuPont.

While DuPont is a leader in titanium dioxide, it may struggle to get an appealing valuation for that unit because prices for the chemical have been weak, said Oppenheimer’s Yang, who is based in Austin, Texas.

Industry Upheaval

“DuPont’s portfolio is kind of an odd mix and investors have wanted the company to simplify it and reduce the cyclicality,” he said. “The difficulty of trying to sell a business at the trough is that it’s going to be tough to come to a meeting of the minds between buyers and sellers in terms of valuation.”

The titanium-dioxide industry is going through a period of upheaval. Rockwood Holdings Inc. is exiting production of the commodity, and chemical maker Huntsman Corp. is considering an offer for the business, people with knowledge of the situation said this month. Tronox Ltd. said in February it was interested in adding to its titanium-dioxide assets.

DuPont would be left with a gap in its revenue that will need to be filled through acquisitions, according to Peter Zeuli, chief investment officer at Voorhees, New Jersey-based Philadelphia Investment Partners LLC. Performance chemicals accounted for about 20 percent of the company’s 2012 revenue.

“Until they come out with a plan of how to fill the hole, there’s going to be a lag” in the stock price, Zeuli, whose firm owns DuPont shares, said in a phone interview. “It’s definitely a wait-and-see until they address that.”

‘Right Decision’

DuPont would get the most value for shareholders by breaking itself into two companies -- one focused on materials and the other on agriculture and nutrition, said Mark Gulley, a New York-based analyst at BGC Partners Inc. The agriculture company would make seeds, crop chemicals, food ingredients and enzymes, similar to Monsanto Co. and Syngenta AG.

“There are only two ag-techs in the world right now, and there is room for a third,” Gulley said in a phone interview. “Valuation today may not support it, but future stock performance could.”

In the past decade, DuPont’s stock has also trailed a ninefold gain at Monsanto, the world’s largest seed company, and a fivefold increase at Syngenta, the largest producer of crop chemicals.

There’s no urgency to sell the more volatile parts of DuPont, according to Rusty Robinson, president of Brentwood, Tennessee-based Robinson Investment Group, which owns DuPont shares. As the economic recovery continues, DuPont in its current form may reach $75 to $80 next year, he said.

“The company is going through an evolution-type process,” Robinson said in a phone interview. DuPont doesn’t have to sell the unit if it doesn’t get high enough bids, he said. “That gives me great comfort that she’s going to make the right decision.”

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