INSIGHT: DuPont and Danisco kick off 2011 M&A with a bang

12 January 2011 16:07  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Merger and acquisition (M&A) activity had been expected to gather momentum in 2011, but the year has got off to a roaring start.

DuPont will reinforce its bioethanol enzyme capabilities and a great deal more if it is successful in its $6.3bn (€4.9bn) bid for Danish biotechnology and food ingredients company Danisco.

The bid, welcomed as a good fit – and a good price – by Danisco management, puts DuPont in an extremely strong position as it strives to develop the enzymes that will create second-generation biofuels as well as other bio-based products. The leader in this race is said to be the closely held Danish group Novozymes.

Also this week, the agreements signed by INEOS with oil giant PetroChina and that company’s parent, China National Petroleum Corporation (CNPC), pave the way for deals in Asia for the chemicals player. PetroChina would gain a strong refining footprint in Europe and more of an opportunity to move downstream into chemicals.

For DuPont, the Danisco bid – the company’s first major acquisition since it bought the Pioneer seeds business for $7.7bn in 1999 – opens up more “megatrend” business opportunities.

Danisco makes food enzymes, and its subsidiary, Genencor, has been a partner with DuPont in bio-propanediol (bio-PDO) and cellulosic ethanol production.

The company’s extensive enzyme expertise will be particularly important to DuPont as the US chemicals giant tries to develop sustainable bio-routes to chemicals. The Danish firm’s food enzymes businesses also complement DuPont’s nutrition and health ambitions.

The acquisition will give DuPont more firepower in emerging “megatrend” markets. “Specifically, we are well aligned with these megatrends in the area of increasing the quantity and quality of food and decreasing dependency on fossil fuels, and protecting people in the environment,” DuPont CEO Ellen Kullman said on 10 January. She added that most of this growth will occur in developing markets.

For DuPont, Danisco brings market access and technology. The industrial enzyme business will enhance DuPont's bioscience businesses and could provide alternative production pathways to products such as fuel ethanol, bioplastics and bio-based elastomers. Genencor has worked on the development of a bio-based route to isoprene with Goodyear. The tyre maker believes the bio-isoprene market could be significant within a few years.

At the technical level, Danisco's enzyme and fermentation know-how fits with DuPont’s strengths in biomass processing and microbe engineering, and is complemented by its global reach, DuPont says.

The acquisition adds important pieces to the jigsaw puzzle that takes DuPont capabilities from crop seeds and traits through bio-processing to global markets as diverse as materials, fuels and food. The combined companies industrial biotechnology revenues would have been $1bn in 2010, DuPont says.

Some analysts rate the deal highly, although DuPont’s share price has suffered largely because of the expected short-term dilution to earnings in 2011. DuPont is set to pay an earnings before interest and tax (EBIT) multiple of 15.2 times for the business.

The financial implications of the agreements with PetroChina and CNPC signed by INEOS on 10 January are not yet known, but PetroChina is expected to acquire a 50% stake in the petrochemical firm's two refineries: Grangemouth in the UK and Lavera in France.

Importantly for INEOS, the deals give the company opportunities to licence more technology in China and possibly in projects involving PetroChina more widely in Asia.

“This is very much the start of much closer cooperation,” INEOS director, Tom Crotty, said on 10 January.

INEOS wants to do more business in China and it needs to secure the future of its upstream refining assets, which are an integral part of its European production network. PetroChina’s interest and the cash expected to be available from the deal to help with de-leverage is clearly welcome.

Both deals give a lift to a year in which a resurgence of M&A activity is expected. There is pent-up demand for deals from both buyers and sellers who have been constrained by financial and market uncertainty but are, at the start of 2011, much better placed.

While deal multiples are rising, this is an M&A market not skewed heavily to buyers or sellers, but one that is conducive to deal making, the experts believe.

($1 = €0.77)

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By: Nigel Davis
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