24 November 2003 00:00 [Source: ICB Americas]Solidifying its focus on higher value added markets, DuPont has finally agreed to sell its global leading textile fibers unit Invista to Koch Industries Inc. for $4.4 billion in cash. DuPont will consider a number of options for its im-pending bounty, including paying down debt, funding pension obligations and launching a stock buyback. The company also hinted at a new restructuring program to drive down cost and achieve growth.
"This is not only the launch of Invista, but the relaunch of DuPont," says Charles O. Holliday, chairman and CEO of DuPont. "We are a smaller but stronger company focused on sustainable growth in our five growth platforms. I am very encouraged about the productivity of our R&D and the use of our science to serve markets globally."
After the deal, expected to close in the first half of 2004, DuPont will have around $20 billion in annual sales. The company's area of focus will be the five growth platforms of electronic and communication technologies, performance materials, coatings and color technologies, safety and protection, and agriculture and nutrition.
While the sale price was less than the $5 billion analysts had expected back in April when DuPont confirmed reports it was in sale talks, it was higher than Invista's recently restated book value of $4.05 billion. Koch is paying a multiple of over 6x trailing 12-month earnings before interest, taxes, depreciation and amortization for Invista.
As the transaction was long anticipated, the reaction from investors was muted, with shares of DuPont trading down 46 cents to $39.73 early last week. The deal is expected to be neutral to modestly accretive to 2004 earnings per share. DuPont points out that the sale will cut its exposure to oil and natural gas-based costs by about 50 percent.
"While the deal was widely expected, it nevertheless is a solid positive for the DuPont transformation from a cyclical $45 billion enterprise to a growthier, less cyclical $20 billion company with a pristine balance sheet," says Frank Mitsch, analyst with Fulcrum Global Partners.
The sale to Koch includes DuPont's interest in 50-50 nylon joint venture DuPont-Sabanci International LLC, which had sales of around $425 million in 2002, as well as its 70 percent stake in DuPont Far Eastern Petrochemical, a purified terephthalic acid joint venture with sales of over $400 million.
However, DuPont will retain its 50 percent stake in European polyester joint venture DuPont Sabanci Polyes-ter Europe, which had sales of about $750 million. DuPont plans to explore its options for this unit in early 2004.
Around 18,000 employees will be transferred to Koch in the deal, leaving DuPont with a work force of about 62,000.
DuPont will retain pension liabilities and assets related to all current US retirees, as well as other post-employment benefits liabilities for all current US retirees. The company will also be responsible for pensions and benefits for all current Invista employees until the close of the transaction. DuPont will transfer pension liabilities and assets related to most of its non-US pension plans to Koch, as well as contribute around $200 million to these plans. DuPont will also be responsible for all environmental liabilities of Invista occurring under its ownership.
With regard to large supply and service contracts between the two companies, Invista will sell adipic acid and hexamethylenediamine to DuPont for its engineering polymers business, while DuPont will sell fluorochemicals to Invista for use in stain-resistant carpet and apparel.
Use of Proceeds
Net proceeds from the sale are expected to be $4.2 billion after the pension contribution and a negligible tax impact. "The first call on cash will be to maintain a strong balance sheet. We're losing Invista's cash flow, so we will reduce some debt to maintain our [credit] ratings," says Mr. Holliday. "We'll also consider prefunding future calls on cash such as pensions, and we'll consider an appropriate level of share repurchase."
Investors appeared disappointed that DuPont did not commit to a large stock buyback program.
"Management is being ultraconser-vative," says Michael Judd, analyst with Greenwich Consultants. "They already have a $2 billion buyback authorization from the board and could start buying back shares right away."
Merrill Lynch analyst Donald Car-son estimates that DuPont will use a substantial portion of the proceeds to reduce net debt, which stood at $8.3 billion at the end of September, in order to maintain its AA- credit rating.
"We also expect DuPont to use about $2 billion from remaining proceeds, cash on hand and cash from operations to complete its previously authorized share repurchase within a year of closing," says Mr. Carson. "While some investors are disappointed that DuPont will not be buying back stock immediately, management has made clear that it expects to use a portion of the proceeds for share repurchase. The delay in our view re-flects management's conservatism and DuPont's stretched credit statistics."
JPMorgan analyst Jeffrey Zekauskas says the sale of Invista is unlikely to result in a share buyback of more than 4 to 6 percent of DuPont's outstanding shares. At a current stock price of $40, that would represent between $1.6 billion and $2.4 billion for stock repurchase.
"DuPont's financial leverage is relatively high with debt/capital of 48 percent at the end of September," he says. "An aggressive buyback would probably lead to an unsatisfactory capital structure and severely limit DuPont's acquisition opportunities."
No Large Acquisitions
Mr. Holliday emphasizes that Du-Pont will not use its cash to make a large dilutive acquisition, but continue on its path of making bolt-on acquisitions to enhance its growth platforms.
"There will be no large dilutive acquisitions. A large acquisition is not the right thing for this company at this point in time," Mr. Holliday says. "I think it would be distracting to our people, distracting to our R&D productivity engine as well as our focus on the growth markets for each platform."
As indicated in February, DuPont plans to eliminate all of the residual costs related to its textile fibers business. The company says it will shortly announce specific actions to ensure competitiveness and achieve growth objectives.
"We believe that significant new restructuring efforts will be taken to lower overhead and improve the cost structure," says JPMorgan's Mr. Zekau-skas. "These initiatives will probably need to be sizeable and executed over a multiyear period."
Mr. Zekauskas points out that pricing has been on the decline for years, accounting for much of the depressed earnings. "We reject the view that inflation in raw material costs and pension expenses are sufficient to account for depressed returns," he says, noting that adding back $660 million in raw material cost inflation and $210 million in additional pension expenses in the first three quarters of 2003 would yield DuPont an operating margin of 12 percent, compared to margins of between 14.7 to 17.1 percent from 1997 to 2002.
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