US DuPont share price tumbles on Danisco deal

10 January 2011 22:28  [Source: ICIS news]

A DuPont bioplastics plant in Loudon TennesseeNEW YORK (ICIS)--Shares of US-based chemical major DuPont fell on the announcement of its $6.3bn (€4.9bn) acquisition of Danish food additives and enzymes producer Danisco.

DuPont’s shares were down 73 cents, or 1.5%, to $49.03 in late afternoon trading on the New York Stock Exchange. Shares had been as low as $47.22 earlier in the day.

Investors were concerned about the price paid for the acquisition and the resulting dilution to earnings, which is not unusual in large acquisitions. Included in the purchase price is the assumption of about $500m in Danisco net debt.

DuPont expected the deal to be dilutive to its reported earnings per share (EPS) by 30-45 cents in 2011. This would include charges for purchase accounting and integration costs.

The company’s previous EPS guidance for 2011 had been $3.30–$3.60.

“While the transaction is forecast to be dilutive in 2011, our back-of-the-envelope calculations suggest 15–20 cents per share possible accretion in 2012 before amortisation expense,” said BB&T Capital Markets analyst Frank Mitsch in a research note.

“Sure, the size of this acquisition comes as a surprise, but we believe between cost synergies - $130m in 2012 - and DuPont’s ability to leverage Danisco’s platforms, that EPS with a $4 handle in 2012 is not a Herculean stretch,” he added.

JPMorgan analyst Jeffrey Zekauskas estimated the transaction cost represents a multiple of around 12.8 times enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA) based on the last 12-month EBITDA of $489m.

The price also represents a multiple of 2.4 times trailing 12-month sales of $2.56bn, he added.

“The deal appears somewhat pricey and raises execution risk,” said Oppenheimer analyst Edward Yang in a research note.

“But DuPont has been operating well, and the $6.3bn price tag is relatively modest versus its stand-alone $51bn firm value, so it deserves the benefit of the doubt,” he added.

“We view DuPont’s… acquisition of Danisco, a global provider of food ingredients, as value-neutral in the near-term, although we understand the strategic rationale,” said Morgan Stanley analyst Paul Mann in a research note.

“[Danisco’s] Genencor subsidiary provides a longer-term call option on DuPont’s biochemicals and biofuels technologies,” he added.

The food ingredients business comprises about two-thirds of Dansico, with Genencor (enzymes) comprising the remainder, noted Mann.

“Although widespread commercialisation of cellulosic ethanol and biobutanol may ultimately prove quixotic, we believe DuPont ought to be able to realise value from this transaction,” said BB&T Capital’s Mitch.

DuPont’s $7.7bn acquisition of US-based seed company Pioneer Hi-Bred in 1999 was widely criticised by the investment community as an overly expensive deal. The company has not made an acquisition on this type of scale since.

($1 = €0.78)

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy
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By: Joseph Chang
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