M&A animal spirits stir

animal spirits.jpgKicking off the New Year with a bang, US-based chemical major DuPont’s $6.3bn (€4.8bn) deal to acquire Danish food ­ingredients and enzymes producer Dansico sets the tone for what will be a huge year for chemical mergers and acquisitions (M&A) in 2011.

If the animal spirits arising from the strong recovery can awaken even DuPont, we will be in full M&A swing sooner rather than later.

The company has avoided mega deals since its $7.7bn acquisition of US seed company Pioneer Hi-Bred back in 1999. While at first, most on Wall Street rushed to praise the deal, and some announced $100 price targets on DuPont’s stock, investors eventually criticized it as being too expensive. After reaching an all-time high of nearly $80 in 1998 after the deal was announced, the stock fell into the $40s by 2000.

Management went out of its way to emphasize its commitment to “financial discipline”, which included eschewing major acquisitions in favor of debt paydown and share buybacks.

Even after the company had built one of the strongest balance sheets in the chemical universe, it was still gun-shy on the M&A front – a legacy of the Pioneer transaction. It likely missed a big opportunity to ­acquire assets during the global financial and economic crisis of 2008-2009 – even as it was dealing with its own cost-cutting issues. It had, arguably, the best balance sheet in the business.

But now, chair and CEO Ellen Kullman is taking a shot with Danisco, to take advantage of the global megatrends in food and fuel (DuPont and Dansico also have a cellulosic ethanol joint venture).

And the deal is not a cheap one. DuPont is paying $5.8bn and the assumption of around $500m in net debt. The purchase price represents a robust EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortization) multiple of 12.8 times trailing 12-month EBITDA, according to JP Morgan analyst Jeffrey Zekauskas.

But at least there is no initial euphoria at the deal on the part of Wall Street analysts or investors. DuPont’s stock closed down 1.5% on the day of the announcement to around $49 – half the price target some had bandied about back in 1998.

Kullman has already boosted DuPont’s competitiveness through the downturn. Now she will put her mark on the storied company through this mega deal.


Photo credit: www.pleated-jeans.com

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