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May 24, 2024

Breakingviews: DuPont’s big breakup could be second-time lucky

by Breakingviews.

How big should a company be? For DuPont de Nemours boss Ed Breen, the real question is: how small? DuPont is about to break up into three companies, separating out its water and electronics units from the business that makes industrial materials such as Kevlar. Over the years, DuPont has grown, shrunk, bought and sold, and produced precious little value for shareholders in the process. This time might actually be different.

The backstory is dizzying. The old DuPont merged with Dow in a $130 billion megadeal in 2017. Both had built up a mish-mash of businesses over more than a century, from electronics to food additives. The new company then remixed itself and broke into three smaller industrials firms – DuPont, Dow and Corteva. At one point, DuPont swapped a food business for a stake in listed International Flavors & Fragrances. Breen stepped down, then came back. Investors have little to show for all of this: the various parts of former DowDuPont are collectively worth $127 billion, less than when they were one company.

 

The new breakup plan might actually achieve what years of financial engineering previously didn’t, and create parts that trade at higher valuations by attracting more specialized investors. Take electronics: Entegris, a rival to DuPont’s electronics business, trades at nearly double DuPont’s multiple of EBITDA, according to Visible Alpha. It’s a similar story for Xylem, which goes up against DuPont in water purification and treatment. Assume DuPont’s units trade in line with those competitors, and the collective’s enterprise value could increase by over $15 billion, Breakingviews calculates.

Smaller could still lead to bigger. Breen has over the years tried sloughing off aging businesses to raise cash he can divert into racier ones, sometimes at value-destructive prices. After the split, his successors will at least run more focused companies with equity they can use as a currency for future mergers. Better yet, if they do trade at better multiples, thanks to current manias for artificial intelligence and green industrial renewal, future deals will be less painful. After years of tortuous tinkering, Breen’s new scheme looks like the right one.

Context News

Chemical and materials company DuPont de Nemours said on May 22 that it would split into three publicly-traded companies. The two new standalone businesses will comprise its electronics and water portfolios respectively. The remaining company, dubbed New DuPont, will be focused on healthcare, automotive, and safety and protection products. The split will not constitute a taxable event for shareholders, the company said. DuPont’s predecessor company merged with chemicals peer Dow in 2017. It subsequently split into three companies, leaving today’s DuPont, as well as Dow and Corteva Agriscience, in 2019. DuPont has since engaged in a series of transactions, including merging its nutrition business with International Flavors & Fragrances in 2021 and selling the majority of a unit known as Mobility & Materials to Celanese in 2022. Alongside the transaction, DuPont said Chief Executive Ed Breen will step down. He will remain executive chairman. Breen led DuPont through its merger with Dow, stepping down following the prior split in 2019, before resuming the role in 2020.

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