DuPont to Split With Spin Off of Performance ChemicalsJack Kaskey
DuPont Co., the biggest U.S. chemical maker by market value, plans to split itself in two by spinning off its performance-chemicals unit, part of an effort to boost shareholder value and focus on higher-margin products.
The tax-free spinoff will be completed in about 18 months, after which DuPont investors will hold all of the new company, Wilmington, Delaware-based DuPont said yesterday in a statement. The unit makes pigments, refrigerants and non-stick coatings, accounting for 29 percent of DuPont’s $6.3 billion of operating earnings last year, the company said in a presentation.
DuPont first said in July it might spin off the unit because of slow-growing, volatile earnings. DuPont Chairman and Chief Executive Officer Ellen Kullman has been under pressure to improve the company’s performance after activist investor Nelson Peltz bought a stake. Agriculture, already the biggest business, will make up 37 percent of DuPont sales after the spinoff.
“Activism is working,” Mark Gulley, a New York-based analyst at BGC Partners LP, said in a note today. “This is indeed a value enhancing move.” Gulley said his sell recommendation on DuPont shares is now under review.
DuPont rose 0.8 percent to $61.90 at the close in New York. The shares have climbed 38 percent this year.
Peltz’s Trian Fund Management LP, a New York-based hedge fund, increased its DuPont stake to more than 21 million shares, or about 2.3 percent, and met top DuPont executives to discuss ways to boost shareholder value, people familiar with the matter said in August.
DuPont’s board was studying options for performance chemicals long before Peltz invested in the company, Kullman said today on Bloomberg Television’s “In the Loop with Betty Liu.” Although she hasn’t met directly with Peltz, DuPont listens to all its shareholders, some of whom are more vocal than others, she said.
“Several investors will say it was their idea,” the CEO said.
Performance chemicals accounted for $7.2 billion of revenue last year, so the slimmed down company would have had $28 billion of sales, DuPont said in the presentation. The unit is the world’s biggest producer of titanium dioxide, a white pigment used in paint and plastics that is known by its chemical formula TiO2. It also produces refrigerants such as Freon, Teflon coating for nonstick pans and chemicals such as cyanide.
Volatile TiO2 markets have created large swings in DuPont’s earnings in recent years. Rising pigment prices made performance chemicals DuPont’s most profitable unit in 2011 with $1.92 billion of operating income. Prices began falling more than a year ago, cutting operating income by 51 percent to $769 million through the first nine months of 2013, DuPont reported Oct. 22.
Under Kullman’s leadership since 2009, DuPont has continued DuPont’s 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, and it acquired food-ingredients and enzyme-maker Danisco A/S in 2011 for about 33.4 billion kroner ($6.2 billion).
DuPont anticipates costs from the transaction will be 1 cent to 2 cents a share in the fourth quarter. Investors should receive the same dividend from the two companies that DuPont will be paying at the time of separation, Chief Financial Officer Nicholas Fanandakis said on a conference call.
Rather than a complete spinoff, DuPont may sell as much as 20 percent of the new company in an initial public offering, Fanandakis said by phone. The exact nature of the spinoff will be determined toward the end of the process, Kullman said in the television interview today.
One of the main reasons DuPont decided against a sale of the unit was the “huge tax penalty” that would have eroded shareholder value, Fanandakis said.
Once Kullman decided to separate performance chemicals, a spinoff was the most likely outcome, Hassan Ahmed, a New York-based analyst at Alembic Global Advisors who recommends holding DuPont shares, said by phone yesterday. Most producers of TiO2, the largest business in the spinoff, would face antitrust obstacles or are too small to acquire the unit, he said.
“This was the only viable option she had,” Ahmed said of the CEO.
Evercore Partners Inc. and Goldman Sachs Group Inc. are strategic advisers on the separation. Skadden, Arps, Slate, Meagher & Flom LLP is providing legal representation to DuPont.