DuPont (DD) is facing increased pressure from Nelson Peltz’s Trian Fund Management after the latter announced its plans to nominate four directors to the chemical behemoth’s board last week, launching one of the biggest activist-investor led proxy battles in recent times. The move to secure board seats represents a fresh attempt by the renowned activist investor to break up the 200-plus year old company.
Trian currently owns roughly $1.8 billion of DuPont’s outstanding shares, making it one of the company’s biggest shareholders with around 2.7% stake. The investment fund said that it will nominate its CEO and founding partner Peltz and other three members (John H. Myers, Arthur B. Winkleblack and Robert J. Zatta) to DuPont’s board for election at its 2015 annual shareholders’ meeting.
Peltz, having a proven track record of success, has been a key force behind the breakup of Kraft into Kraft Foods Group (KRFT) and Mondelez International (MDLZ).
DuPont, in response to Trian’s announcement, said that its board will review Trian's proposed nominations and come up with a recommendation that is in the best interest of its shareholders. The company also defended itself by saying that its 13-member board and management have a track record of delivering healthy shareholder returns and will remain committed to carry out strategies to boost growth and profitability.
DuPont further noted that it has actively executed strategic actions including portfolio optimization and has delivered a 266% return to shareholders under the existing leadership since end-2008 vis-à-vis a 159% return for the S&P 500 for the period.
DuPont also added that it remains on track with its productivity actions and the spin off of its Performance Chemicals division to create a new entity called ‘Chemours’. Cost savings of at least $1 billion is also expected through its company-wide redesign initiative. DuPont also said that Trian’s move has the potential to disrupt the company and came despite its multiple efforts to engage in constructive dialogues with the hedge fund.
DuPont’s shares fell 1.4% to close at $73.50 last Friday. The company, which has a market cap of roughly $67 billion, has delivered a one-year return of roughly 15%.
DuPont came under pressure in Sep 2014 after Trian pressed the company for breaking itself up into two distinct companies citing that its current conglomerate structure and flawed business plans are destroying shareholder value. Trian – in a letter to investors – said that the suggested move could materially improve DuPont’s financial performance and double the value of its stock within next three years.
The investment firm suggested DuPont to separate its high growth businesses – agriculture, nutrition and health, industrial biosciences – from its cyclical/high cash generative businesses – performance materials, safety and protection, electronics and communications – in addition to the spin off of the Performance Chemicals unit. It also urged DuPont to eliminate unnecessary holding company costs (estimated at $2–$4 billion of excess corporate costs).
Trian claimed that DuPont’s board is unwilling to hold its management responsible for its sustained underperformance and failures to meet sales and earnings targets and the company has significantly underperformed the diversified chemical companies and industrial conglomerates in terms of shareholder returns and earnings per share (EPS) growth.
However, DuPont have been actively shielding itself against such breakup calls while remaining focused on executing strategic actions including portfolio optimization, disciplined capital allocation and cost control.
DuPont remains focused on seeking opportunities to optimize its portfolio by selectively spinning off or selling its underperforming assets that are exposed to raw material price fluctuations. The company is selling off its struggling performance chemicals business that makes titanium dioxide (TiO2). DuPont, earlier in 2013, also jettisoned its performance coatings business to equity firm Carlyle Group for $4.9 billion in cash.
These moves reflect a part of DuPont’s strategy to gradually shift its focus to high growth businesses, including agriculture and nutrition, in an effort to cut its exposure to low-margin businesses.
Similar moves are also being pursued by other chemical makers including Dow Chemical (DOW) which is carving out a major portion of its chlorine business that has been in operation for over 100 years. Commodity chemicals assets that are being identified for separation represent up to $5 billion in revenues.
Dow also came under pressure in early 2014 after activist investor Dan Loeb's Third Point hedge fund bought a major stake in the company by reportedly forking out $1.3 billion. Loeb urged Dow to spin off its sluggish petrochemicals business and focus instead on high-margin, fast growing businesses with a view that the move will create more value for the company’s shareholders.
However, Dow and Third Point reached a crucial agreement in Nov 2014, under which, the former agreed to add four new, independent directors to its board (including two suggested by Third Point), thus avoiding the possibility of a proxy battle between them. Both also agreed to a one year customary standstill agreement. The agreement came after Third Point increased pressure on Dow with its demand for board seats and followed several negotiations between Dow’s CEO Andrew N. Liveris and Dan Loeb.
Both DuPont and Dow are Zacks Rank #3 (Hold) stocks.
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