26 July 2013 08:47 [Source: ICB]
DuPont may find it challenging to create value from a potential spin-off or sale of its titanium dioxide (TiO2), fluoropolymers and process chemicals businesses.
In the case of a sale, potential bidders for US-based DuPont's titanium dioxide business will likely be major private equity firms, investment bankers said. "Combining DuPont's TiO2 business with another TiO2 player would be problematic, as it's a concentrated industry," said one banker. "It will be a festival of financial sponsors that look at this asset - the big names like Blackstone, KKR and Apollo."
On 23 July, DuPont said it is exploring strategic alternatives for its performance chemicals segment to continue its "transformation into a higher growth, less cyclical company". This segment, which generated $7.2bn (€5.5bn) in sales in 2012, includes the company's TiO2 business, as well as fluoropolymers and other industrial chemicals. "DuPont may pursue a different strategic alternative for each business," the company said.
Another banker said: "I don't think any one player in TiO2 can buy DuPont's business. And even for private equity players, they may need to team up given its size - it could be two to three PE firms bidding for the entire performance chemicals business."
HANDFUL OF PLAYERS
The global TiO2 business consists mainly of a handful of players, including US-based companies Huntsman, Tronox, Kronos and Rockwood, along with Saudi Arabia-based Cristal. DuPont is the global leader in TiO2. However, a number of China-based companies have also made inroads in the white pigment.
And paint producers including AkzoNobel, and US-based PPG Industries and Sherwin-Williams have focused on reducing their use of TiO2 in formulations following a multi-year price spike. Of the major players, Huntsman and Rockwood are also exploring options for their TiO2 businesses.
Another banker called into question DuPont's potential plan to separate its TiO2 business at this time. "The real problem here is: How does DuPont do a deal at a high enough price that makes sense? The company has been buying assets at 10-12 times EBITDA [earnings before interest, tax, depreciation and amortisation] but they are not going to get anywhere near that for performance chemicals," said the banker. "We know how people feel about the TiO2 business now. For a cyclical business like this, you want to sell when times are good. It's a terrible time to be a seller."
DuPont's performance chemicals business generated around $1.6bn in pre-tax operating income in 2012, or 28% of the total for the company. The divestment of that business, including TiO2, would leave a big hole in the company's profit picture. Frank Mitsch, an analyst with Wells Fargo, said: "While we understand that TiO2 is a cyclical business with GDP-type growth, we also believe it to be a great cash generator over a cycle that helps fund the other higher growth entities within the DuPont portfolio, as well as the above-market dividend."
DuPont may be facing pressure to divest the more cyclical businesses because of media reports that activist investor Nelson Peltz bought a major stake in the company through his investment vehicle Trian Fund Management. "This is a case where I understand the pressure since an activist investor has bought shares [of DuPont]. But if you want to get rid of a commodity business, you have to do it when times are good. A couple of years ago, people were in love with TiO2," said the banker source. "It is not so clear that a sale or even a spin-off of TiO2 or fluoropolymers would be the right move."
One Wall Street analyst views a spin-off as a stronger possibility. "If TiO2 is bottoming, a sale would appear premature. But a spin/split leaves that decision with investors," said John Roberts, an analyst with UBS.
"DuPont used that option with Conoco, and TiO2 producer Tronox was spun from Kerr-McGee. That could also explain why Fluoroproducts and Chemical Solutions (process consulting and refinery acid regeneration) are being included. More scale/scope allows for less cyclicality, higher leverage, flexibility in assignment of liabilities (retirees, environmental), and tax efficiency," he added.
DuPont Chemicals and Fluoroproducts, part of the performance chemicals business, produces specialty fluorochemicals, fluoropolymers and performance chemicals.
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