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DuPont: Better living through M&A

by George White and Aaron Timms | Published November 19, 2012 at 12:25 PM

When Ellen Kullman, the then-newly appointed CEO of DuPont, announced in 2009 that the company was embarking on a new expansion strategy with aggressive growth targets for particular business lines and a renewed focus on nutrition, renewable energy and industrial biosciences, many analysts scoffed. This was E.I. DuPont de Nemours & Co., the 200-year-old industrial conglomerate with a history as long as its name. This was the industrial giant that, from its modest origins as a gunpowder mill in the earliest days of the American republic, had evolved into a key materials innovator through the decades of high industrialization in the West before settling, in recent years, into a rather cumbersome middle age as a multi-limbed chemicals conglomerate with 70,000 employees and a presence in more than 80 countries.

The company was big, but its M&A profile in recent years had been relatively small. The only acquisition of any note that DuPont had made in the preceding decade was the 1999 purchase, for $7.7 billion, of Pioneer Hi-Bred International Inc., the hybrid seed developer and producer.

In the two years since Kullman set out her new vision, DuPont has successfully confounded skeptics, with its small, 10-strong M&A team, led by company veteran Carmen Giannantonio, commandeering a decisive strategic shift away from the chemicals and coating businesses associated with the "old industry" legacy of the company's history and toward faster-growing agriculture and nutrition. It is that record of achievement that has seen DuPont named this year's Most Admired Corporate Dealmaker in the materials sector. (DuPont declined requests to comment for this story.)

The 1999 purchase has proven to be pioneering in more than just name: Over the past three years, DuPont has snapped up 7 U.S. seed companies, all smaller deals, and bought out minority partner Bunge Ltd.'s 28% stake in a soy-based ingredients joint venture, Solae LLC.

The jewel in the dealmaking crown, however, has been the $6.4 billion purchase, in January 2011, of Danish food additives and enzymes manufacturer Danisco A/S. The acquisition was a model of the dealmaker's art, with Giannantonio and his small team, the members of which have functional specialties that align with DuPont's traditional concerns but were otherwise relatively untested in the nutrition business, withstanding multiple challenges and pitfalls along the way.

The courtship lasted four months, encountered staunch resistance from at least one disgruntled Danisco shareholder, and was buffeted by interest from rivals such as Royal DSM NV, the Dutch vitamins manufacturer.

Even once announced, "the market was very surprised by the Danisco deal," said Min Tang-Varner, an analyst who covers DuPont for Morningstar Inc. Here was the venerable, staid, lumbering chemicals manufacturer, suddenly remade as a cutting edge nutrition and agriculture business. Prior to the deal, food and nutrition occupied a tiny segment of DuPont's business and were subsumed within the agriculture unit; in the two years that have elapsed since Danisco was closed, nutrition has been spun out into a standalone unit and when its results are combined with agriculture now accounts for roughly 50% of the company's overall profits.

But Danisco was not only appealing for its contribution to DuPont's emerging nutrition business; the enzymes arm of Danisco's operations was also a boost to DuPont's position in advanced biofuels technologies. This synergy points to a broader pivot toward a three-pronged growth focus that has emerged under Kullman's leadership: With global population expected to reach 9 billion by 2050, the company is aiming to reposition itself for the reality of a hungrier, more crowded world by focusing on nutrition and agriculture, renewable energy, and the protective materials business.

The apparently sensible bet is that as the world grows and emerging markets become more affluent, the need for more versatile crop varieties and more reliable and efficient alternative energy sources will be felt more intensely than for chemicals and new types of car paint. Some 85% of DuPont's 2011 research and development budget has been given over to these three core areas of food, energy and protection.

Disappointing third-quarter results, which saw the company's quarterly net income drop to $10 million from $452 million a year previously, have resulted in a decline in the group's share price to around $43 today from $49 immediately prior to the earnings announcement, but this does little to mask the fact that the stock has hit multiyear highs in the 18 months since the Danisco deal was finalized, touching almost $57 midway through last year.

Kullman responded to the third-quarter reverse with the announcement that around 1,500 jobs will be cut, and there appears no sign that the long-term growth vision will be knocked off course.

That vision has been borne out on the other side of the dealmaking ledger as well. While acquisitions have mounted, Giannantonio and his team have engineered divestitures of some of the company's underperforming legacy units that are not aligned with the new long-term growth strategy. Following a bidding war among several private equity heavy hitters, including Kohlberg Kravis Roberts & Co. LP and Apollo Management LP, in August DuPont sold its automotive coatings business to the Carlyle Group for around 12 times forward earnings, a deal analysts estimate will net the company $4.9 billion in cash and cut $250 million in unfunded pension contributions. Operating margins on the performance coatings business were around 5%, well below the overall 15% average observed across the company.

"The traditional chemicals business, at the end of the day, is GDP plus growth," Tang-Varner said. "You can't really do any better than the level that GDP is growing at. So no matter how good your business is, in chemicals you're always going to be exposed to the volatility and cyclicality of overall GDP growth. It's not a stable arena for growth -- you don't have a secular growth trajectory. But the genetic seed business and the nutrition business do have that secular trend."

Looking ahead, analysts expect DuPont to use proceeds of the coatings sale to pay down $800 million to $900 million of debt to ensure it stays within the wheelhouse of an A-credit rating. Cooley May, an analyst at Macquarie Securities, then sees the company funding $8 billion to $9 billion of internal capex and stock buybacks. Meanwhile, further deals spanning agriculture, nutrition and biosciences are likely over the next 12 to 18 months. For DuPont, even as it integrates new units and adapts to the reality of a reshaped whole, the theater of reinvention will go on.

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