Breakingviews: DuPont comes out smelling of roses in $45 bln deal

Sharing food can be fun, especially when you eat more than you bring to the meal. Ed Breen is in roughly that happy situation. The executive chairman of DuPont de Nemours agreed to merge his nutrition and biosciences business into International Flavors & Fragrances for a $26.2 billion enterprise value.

Breen’s dining partner is Andreas Fibig. IFF’s ambitious chairman and CEO concisely summed up the deal’s logic: “together we are present in roll, cheese and (vegan) burger”. IFF’s lab wizardry helps give some flavourful zest to bland foods, while DuPont’s business manufactures, among many other things, plant-based proteins and binding agents. They hope the combination will cut annual costs by $300 million, and encourage big clients to buy more natural colourings, emulsifiers and so forth.

It looks like Breen’s shareholders are getting the juiciest morsels. They get a $7.3 billion special cash payment and 55.4% of the combined business, once the spun-off unit is merged with $14.3 billion IFF. Based on IFF’s Dec. 13 share price, that implies an enterprise value for the DuPont business of 17.1 times the 2020 EBITDA expected by Melius Research. IFF and its peers Symrise and Royal DSM trade on an average 14.7 times multiple, using Refinitiv data.

Breen, who is running one portion of the company created by the 2017 merger of Dow Chemical and the old DuPont, also has good news on taxes. He has structured the merger as what is known as a reverse Morris Trust transaction, which does not trigger any U.S. capital gains taxes. The rules require a sequence of spin-off and merger, with original shareholders ending up with at least 50.1% of the combined company’s shares.

IFF’s shareholders may be less enthusiastic. Fibig is swallowing a much larger company at an expensive valuation and adding a slug of debt in the process. His investors are already dealing with a bitter aftertaste from the $7.1 billion acquisition of Frutarom. IFF shares are down 6% since Fibig announced the deal in May 2018. The DuPont transaction might come with a slightly off odour.

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