November 3, 2021

Breakingviews: DuPont financial tinkering comes at too high price

by Breakingviews.

If only shareholder value were as durable as Kevlar. DuPont, which makes that protective substance, is paying $5 billion for peer Rogers to capture the glow of rising demand for electric vehicles. After a $130 billion mega-merger, two spinoffs and multiple asset sales and purchases, DuPont faces a high bar in proving its financial tinkering will leave investors better off.

Executive Chairman Ed Breen is offering roughly a 33% premium for Rogers, which makes materials for car batteries, self-driving systems and clean energy. At the same time, DuPont is looking to sell most of its mobility and materials business, unloading products that serve old-economy markets like internal combustion engine cars that suffer from high commodity prices. The switch makes sense: DuPont is getting out of its lowest-margin and most volatile business, while Rogers gives it more access to future-proof customers. After the deals, DuPont will be more profitable overall.

The problem is price. The deal looks likely to destroy value for DuPont shareholders. Rogers is expected to generate $246 million in operating profit in 2023, according to Refinitiv. That’s the year DuPont expects to hit a full $115 million in cost synergies. Taking tax into account, that implies a return of only 5.8%.

DuPont might be able to drum up more revenue by controlling more of the components in high-growth electric vehicles, though it’s not using that argument to justify the deal. Breen’s fellow executives did, though, point on Tuesday to the company’s $2.3 billion purchase of Laird Performance Materials in March, which has generated higher profit than originally estimated. Like Rogers, Laird is focused on serving high-tech electronics markets.

But DuPont hasn’t matched that success over the longer term. The combined market cap of the company and its spinoffs is still below where they were as one company under DowDuPont at the beginning of 2018. Mergers and acquisitions always require a degree of trust that things will work out; DuPont is starting on the back foot.

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