Shares of DuPont (DD) screamed higher yesterday after Nelson Peltz’s Trian Fund Management, L.P pushed the chemical behemoth for breaking itself up into two distinct companies citing that its current conglomerate structure and flawed business plans are destroying shareholder value.
Peltz, a renowned activist investor with 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).
Trian – in a letter to investors – said that the proposed move could materially improve DuPont’s financial performance and double the value of its stock within next three years.
Trian currently owns roughly $1.6 billion of DuPont’s outstanding shares, making it one of the company’s biggest shareholders with nearly 3% stake. The entity has been exchanging dialogues with DuPont’s management over a year regarding measures that could be taken to lift up the company’s performance.
DuPont, in response to the letter, defended itself by saying that its board and management remain committed to carry out strategies to boost growth and profitability. The company, over the years, has executed strategic actions including portfolio optimization and disciplined capital allocation that has delivered a 200% return to shareholders since end-2008 vis-à-vis a 144% return for the S&P 500 for the period.
DuPont further noted that the spin off of its Performance Chemicals division (expected to close by mid-2015), its $5 billion share repurchase program and cost savings of as much as $1 billion through its redesign initiatives manifest the company’s commitment to bolster shareholder value. The company also said that it welcomes open discussions with shareholders and all constructive input.
However, Trian is of the opinion that these strategic actions are not sufficient to optimize shareholder value. The entity also stated that DuPont’s board is unwilling to hold its management responsible for the sustained underperformance of the company and failures to meet sales and earnings targets. Trian said that DuPont has significantly underperformed the diversified chemical companies and industrial conglomerates in terms of shareholder returns and earnings per share (EPS) growth.
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).
Investors reacted favorably to the news, sending DuPont’s shares up 5.2% to close at $69.25 yesterday. The 200-plus year old company, which has a market cap of $63.4 billion, has delivered a one-year return of roughly 19%.
DuPont is actively 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), which is used to give paint and other coatings a white hue.
DuPont, earlier in 2013, also sold its performance coatings business to equity firm Carlyle Group for $4.9 billion in cash. Moreover, the company has also jettisoned its glass laminating solutions and vinyls business to Japan-based fibers maker Kuraray.
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). Dow 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.
Both DuPont and Dow are Zacks Rank #3 (Hold) stocks.
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