Hedge fund Trian Fund Management (New York) has called on DuPont to split off its higher-growth agriculture, nutrition, and industrial biotech operations. The company’s current conglomerate structure and resulting inefficiencies has led to “continuing underperformance and repeated failures to deliver promised revenue and earnings targets,” Trian says in a letter to DuPont’s board. Trian, led by activist investor Nelson Peltz, says its proposed initiatives “have the potential to double the value of DuPont’s stock over the next three years.” Trian, which first disclosed a DuPont stake in July 2013, says it holds a $1.6-billion stake in DuPont, a roughly 2.5% share. Trian says that its call for a “Trian representative and an industry-insider” to be added to DuPont’s board has been rejected.
“DuPont’s conglomerate structure is destroying value,” Trian says in a letter to the company’s board. “Even after the spin-off of performance chemicals, which is expected to be completed in mid-2015, DuPont will remain an inefficient conglomerate.” Trian welcomes the DuPont’s planned spin-off of performance chemicals, recent restructuring, and $5-billion share buyback—but says the moves are not enough. Trian estimates that DuPont’s current operating structure results in $2–4 billion in excess corporate costs. The letter adds that DuPont’s disparate business, complexity, and bureaucracy leave management incapable of meeting guidance and result in below-peer organic growth and margins. DuPont trades at “a persistent conglomerate discount because it is neither a pure-play growth company, nor a cyclical recovery play, nor a capital return story,” Trian says. “Importantly, it fails to deliver low earnings-per-share (EPS) volatility and strong EPS growth, the fundamental rationale for a conglomerate.” The letter also highlights what it calls “missteps” related to DuPont’s spin-off of its coatings business, integration of the Danisco acquisition, failure to meet earnings targets, and frequent use of one-time extraordinary charges in recent years.
DuPont defends its recent progress, saying that it has “taken firm action over several years that has delivered 220% total shareholder return since year-end 2008 compared to 144% for the S&P 500 during the same period.” The company says it remains committed to further increasing shareholder value, citing its plans to cut costs by $1 billion via restructuring and spin off performance chemicals, as well as a $5-billion share repurchase program. “DuPont welcomes open communications with shareholders and values input toward our common goal of enhancing shareholder value,” DuPont says. “We speak and meet with shareholders frequently, and while it is our policy not to comment on discussions with specific shareholders, we have had a constructive dialogue with Trian.”
Trian says in the letter that DuPont’s “growth” assets in agriculture, nutrition and health, and industrial biosciences should become a separate company that prioritizes “high-return-on-invested capital organic growth initiatives.” The company containing the “low-growth and highly cash-generative” performance materials, safety and protection, and electronics and communications businesses should commit to a “shareholder-friendly capital allocation policy.”
Trian also calls on DuPont to implement zero-based budgeting, set a time frame to achieve best-in-class revenue growth and margins in each business, end extraordinary charges. and improve the transparency and consistency of financial reporting.
“The Trian initiatives will eliminate the inefficient holding company structure by creating two autonomously managed businesses,” Trian says. “We believe it will significantly increase the probability that the individual businesses eliminate the significant operational performance gap versus peers and achieve a valuation multiple rerating.”
Peltz and Trian have prior chemical industry experience. In 1986, Avery, controlled by an investment group led by Peltz, purchased the chemical operations of Uniroyal in a leveraged buyout. Avery then sold Uniroyal Chemical via a management-led buyout in 1989. Uniroyal was subsequently acquired by Crompton & Knowles in 1996, a predecessor to Chemtura. Trian also acquired a large stake in and gained a board seat at Chemtura in 2007.
By Robert Westervelt
