Hedge fund Trian Fund Management (New York) last night continued its campaign against DuPont management by nominating four directors to the company’s board. The four are Trian CEO and founder Nelzon Peltz; John Myers, CEO of GE Asset Management; Arthur Winkleblack, CFO of food company H.J. Heinz; and Robert Zatta, acting CEO and CFO of Rockwood. The fund reiterated its call for DuPont to split into two companies – a “GrowthCo” consisting of ag, nutrition, and industrial bioscience, and a “CyclicalCo/CashCo” consisting of performance materials, safety and protection, and electronics and communications. DuPont filed for its long-planned spinoff of its commodity chemicals business in late December, but Trian believes the spin-off does not go far enough.
In a letter to DuPont’s board, Trian stated that “DuPont’s conglomerate structure is destroying value.” The fund estimates that the company incurs $2-4 billion in “excess corporate costs” as a result of the conglomerate structure, and that its shares also trade at a discount relative to pure-play growth, cyclical, or capital-return investments. The letter also says that DuPont’s structure leads to “overwhelming complexity” and “bureaucracy and a lack of accountability,” noting that the company “lowered and/or missed earnings guidance for the third consecutive year” in June 2014.
Trian’s letter uses the 2012 sale of the automotive coatings business, now Axalta, as an example of DuPont’s alleged inefficiencies. The letter notes that Axalta generated $813 million/year in Ebitda according to an IPO filing last year, compared with $339 million/year in 2011, before DuPont sold the business. The letter also notes that, according to Axalta’s IPO filing, pro forma Ebitda in 2011 was $538 million, implying “that DuPont burdened the coatings segment with $229 million of excess corporate costs in 2011.” Trian also criticizes DuPont for selling coatings, rather than spinning it off to shareholders.
The letter makes other claims about DuPont’s inefficient uses of capital, as well. It notes, multiple times, that DuPont’s unallocated corporate expenses total $1 billion, and “include the maintenance of a country club, a 1,252-seat theatre, and a 217-room hotel.”
In a statement in response, DuPoint restated its commitment to shareholders and its overall corporate strategy. The company says it has outperformed its proxy peers and the S&P500 index over the last one, three and five years – although Trian claims that these points of comparison are not relevant, as the proxy peers include companies, such as Procter & Gamble and Johnson & Johnson, with vastly different businesses. Still, DuPont’s capital return to shareholders has been double that of its proxy peers since the start of 2009, the company notes.
DuPont also defended its corporate structure, and criticized Trian for launching a proxy fight as the company prepares to separate its performance chemicals segment. “Our businesses benefit from significant competitive advantages as part of DuPont. The combined power of DuPont’s science platform, our global scale, market access, and infrastructure leverage, along with our established brand and solid financial foundation, have enabled us to deliver strong returns. Despite numerous efforts to engage constructively, including multiple calls and meetings with our CEO, CFO and lead independent director, Trian has chosen this path with the potential to disrupt our Company at a key stage of execution against our plan,” DuPont says.
In its letter to the board, Trian calls out DuPont for a lack of engagement. “We were very frustrated by the lack of interaction after we had presented our white paper to management in July 2013,” Trian says. Trian says it met with senior management and company advisors twice, including once with CEO Ellen Kullman, in the four months following the presentation of the white paper. However, Trian’s letter did not comment on whether the fund’s representatives have met with DuPont since then.
Trian revealed its stake in DuPont in 2013, and called for a break-up of the company last September. Funds managed by Trian currently hold a 2.7% stake in DuPont, totaling about 24.4 million shares valued at about $1.8 billion. Trian is DuPont’s sixth-largest shareholder, according to Thomson Reuters data. Its largest shareholders are institutional index funds Vanguard and State Street.
By Vincent Valk