Bowing to Wall Street, DuPont to spin off titanium dioxide performance chemicals unit

Bowing to Wall Street, DuPont to spin off titanium dioxide unit

Thu, Oct 24 2013

By Ernest Scheyder

(Reuters) – DuPont (DD.N: Quote, Profile, Research, Stock Buzz) said on Thursday it will spin off its titanium dioxide unit into a separately traded public company within 18 months, yielding to intense pressure from Wall Street to divest the volatile business. Spinning off the performance chemicals business, which also sells refrigerants, would allow DuPont to focus more on specialty materials and agriculture, two growth areas.The unit makes titanium dioxide, a popular pigment found in products ranging from car paint to sunscreen. Prices for the product, which alone accounted more than a fifth of the company’s 2012 revenue, have been on a roller-coaster for the past several years, wildly affecting DuPont’s profit and stock price.

“Investors love the business on the way up,” DuPont Chief Executive Ellen Kullman said in a December 2012 interview with Reuters about the unit. “But investors don’t like the turns. Turns are hard to predict in the Ti02 market.”

Kullman, who ran the titanium dioxide business in the 1990s, has previously championed DuPont’s decision to increase capacity by building a new plant due to start production by 2014.

Yet investors have agitated for months about DuPont’s low stock price compared with those of rivals Monsanto (MON.N: Quote, Profile, Research, Stock Buzz) and BASF (BASFn.DE: Quote, Profile, Research,Stock Buzz). While DuPont is the second-largest seed maker after Monsanto, its stock trades at a large discount to its rival.

On several recent quarterly earnings conference calls, DuPont executives have faced numerous questions from investors and analysts about the future of the performance chemicals business within DuPont.

As early as last year, top Wall Street analysts tracking DuPont, including Deutsche Bank’s (DBKGn.DE: Quote,Profile, Research, Stock Buzz) David Begleiter and BGC Partners’ Mark Gulley, called for the company to divest the titanium dioxide business.

Earlier this summer Trian Fund Management, headed by Nelson Peltz, disclosed a stake of 5.78 million shares in DuPont, saying the stock was undervalued and had potential to grow. Peltz did not disclose publicly how he sought to increase value at DuPont, though many Wall Street analysts speculated he sought a breakup of the company or spinoff of major units.

DuPont said it has been exploring the divestment of the unit for some time. “We’ve been exploring strategic options for Performance Chemicals for more than a year. In fact, the transformation of DuPont began in 2009 under the new management team” when Ellen Kullman became CEO, said Nick Fanandakis, DuPont’s chief financial officer.

DuPont said its existing shareholders will own 100 percent of the performance chemicals business after the spinoff. The spinoff would likely reduce fourth-quarter earnings by a penny to 2 cents per share.

Executives have not been chosen for the new unit, though existing unit leaders, including Executive Vice President Mark Vergnano, are likely to remain, Fanandakis said in an interview.

Kullman will remain DuPont’s CEO and no job cuts are planned for the unit’s 7,500 workers, he said. The new company will assume a “commensurate” share of DuPont’s current debt load and expects to have a low investment-grade credit rating, he said.

The spinoff will take 18 months to review unit financials, audit them, and separate other business functions, Fanandakis said.

“There’s a lot of things that have to be done,” he said.

The combined quarterly dividend payments of both DuPont and the spun-off company will equal the currently quarterly payout of 45 cents, DuPont said in a statement.

“It’s not cutting (the dividend), it’s reapportioning,” Fanandakis said.

DuPont expects the new business to have annual sales of roughly $7.2 billion after the deal closes and its remaining businesses to have annual sales of $28 billion.

Shares of DuPont rose 2.6 percent to $63 in after-hours trading. The stock has gained 37 percent so far this year.

 

October 24, 2013 11:23 pm

DuPont to spin off performance chemicals unit

By Ed Crooks

DuPont, the largest US chemicals group by market capitalisation, will spin off its division making paint pigments, refrigerants and Teflon, as it seeks to focus on businesses with a greater emphasis on technological innovation.

DuPont shareholders will be given complete ownership of the new company under the plan, which follows a strategic review of options for the business launched by the board in July.

The business has been valued by analysts at Citi at $11.5bn, about one-fifth of DuPont’s market capitalisation.

Ellen Kullman, DuPont’s chief executive, said the performance chemicals division would be “a very strong industrial chemicals company”, but its low growth and volatile earnings meant it was no longer a good fit with the group’s strategy for growth in areas such as agriculture and energy.

The business had revenues of $7bn and pre-tax operating profits of $1.6bn last year, but third-quarter profits in 2013 dropped 38 per cent to $254m, the company reported earlier this week.

Ms Kullman said new products were DuPont’s “lifeblood”, and the titanium dioxide pigments business, which is the largest component of the division being spun off, did not offer much scope for innovation.

The spin-off is part of a restructuring of the group by Ms Kullman launched in 2009, and follows the $4.9bn sale of DuPont’s performance coatings business, which makes paint for cars and other industrial uses, to Carlyle, the private equity group, in February.

Ms Kullman said the company decided to spin off rather than sell the performance chemicals division in order to expedite the separation by cutting out potentially protracted negotiations with buyers, and to avoid the tax charge that would have been created by a sale.

Trian, the fund led by activist investor Nelson Peltz, revealed an interest in DuPont in July, and has taken a 0.6 per cent stake. Ms Kullman refused to say whether she had discussed the spin-off plan with Mr Peltz, saying only that she met investors “all the time”, and that the restructuring had been under way years before Trian took its stake.

She added: “I expect there are several investors who will say it was their idea.”