According to industrial sources, private equity firms are joining hands to bid for chemical giant E. I. Du Pont de Nemours and Company‘s (DD) car paint business. The intention is to share the cost which is estimated to be more than $4 billion.
DuPont’s Performance Coatings business reported sales of $1.1 billion in the fourth quarter of 2011, representing about 13.1% of the total revenue of $8.4 billion. The segment accounted for only 7.6% of the total pretax operating margin. This margin represents half of the corporate average. Thus, the industry sources pointed out DuPont was considering the sale of car paints division in order to improve its portfolio.
Around ten private equity firms have shown interest and the first round of bids for the unit is due on March 7. The bid will require the firms to pay huge sum of around $1.5 billion to $2.0 billion so by teaming up together the buyout firms will be able to share the costs. The company's adviser on the agreement, Credit Suisse Group (CS) had sent financial resources connected to the unit sale to concerned clients in February 2012.
The company’s unit has not been performing as per expectations and high energy and freight costs have also been a drag on the unit. Given this conditions, the company’s decision to sell off this unit can prove more profitable for it.
Despite soft demand for consumer electronics segment and weak markets for housing and construction, DuPont delivered exceptional results for full-year 2011. The company reported earnings of 35 cents per share in the fourth quarter of 2011 compared with 50 cents in the year-ago quarter. The profit exceeded the Zacks Consensus Estimate of 33 cents per share.
A higher tax rate in the quarter led to the year-over-year decline in profit. Further, higher selling prices during the quarter was offset by increased spending on selling, marketing and research and development, higher costs for raw materials, energy and freight as well as lower sales volumes.
For full-year 2011, the company reported earnings of $3.93 per share, up 20% from $3.28 per share in 2010, exceeding the Zacks Consensus Estimate by a penny. Sales in the quarter grew 14% to $8.4 billion due to an increase of 14% in prices and higher agriculture segment sales. However, the quarter witnessed declining sales volumes due to destocking in photovoltaics, polymer and industrial supply chains. The consumer electronics and construction division also faced soft demand. For fiscal year 2011, sales jumped by 20% to $38.0 billion.
We believe that the slowdown in global economic growth in the fourth quarter will continue in the first quarter of 2012, gradually improving in the second half of 2012. The company also faces stiff competition from The Dow Chemical Company (DOW) and BASF SE (BASFY).
However, markets for DuPont's agriculture and food businesses continue to be strong, especially with a strong planting season in Latin America. Therefore, the company retains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating and we have recommended the shares of the company as Neutral for the long-term (more than 6 months).
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