Megatrend Madness
Jan12

Megatrend Madness

A big part of what I do for a living is attending press conferences and listening to conference calls where top executives from leading chemical firms talk about their companies. Oftentimes, they invoke “megatrends” to justify what they are doing or otherwise convince shareholders that they are on the ball. All the leading chemical companies have them. They are the mission statements of the post-Friedman, Thomas not Milton, flat, hot world. Here are a few of the most prominent examples: DuPont: Increasing Food Production, Decreasing Dependence on Fossil Fuels, Protecting People and the Environment, and Growth in Emerging Markets. BASF: Growing and Aging Population, Urbanization, Energy Demand and Climate Protection, and Mobility and Communication Dow: Energy, Consumerism, Transportation Infrastructure, and Health And Nutrition. When these companies and others talk about Megatrends, I either put down my pen or start doodling with it. I perk up again when companies get down to brass tacks. Megatrends strike me as too obvious to be a serious tool to justifying anything. For example, DuPont recently invoked the food production and fossil fuel trends when it announced its purchase of Danisco. Fine, the company makes food additives and has technology that can be applied to cellulosic biofuels. The problem is that those megatrends tell me nothing about whether it will be a good acquisition or not. That depends on the specific value propositions of the Dansico businesses, and its pipeline, to specific markets as well as new opportunities that wouldn’t be possible without a DuPont/Danisco combination. DuPont might have used the same megatrends to argue for the purchase of Clorox’s Kingsford Charcoal unit—charcoal is made of wood and is used to cook food. (Heck, Kingford’s charcoal briquettes were originally made from the wooden remnants of Ford Model T production.) Dow’s megatrends are the most egregious because they are so vague. Energy and Nutrition have been “megatrends” ever since the first caveperson roasted the first boar over the first fire. And Dow’s megatrends can justify ANYTHING. Can Dow go out and buy Brown Forman? Sure. They can invoke consumerism: A growing and increasingly wealthy population will demand more Jack Daniel’s and Southern Comfort. There might even be a biofuel connection because of Brown Forman’s ethanol expertise. BASF’s are the most specific. Though, urbanization has been with us for quite a long time as well. In the interest of not wanting to sound overly shrill, I don’t want to accuse these firms and other companies of being insincere. I do think they actually believe in this megatrend stuff. And nobody likes to make mistakes with hundreds of millions of dollars. When companies make investments, I do...

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A Few Observations About DuPont/Danisco
Jan10

A Few Observations About DuPont/Danisco

This morning, DuPont announced a deal to purchase Denmark’s Danisco for $5.8 billion in cash plus $500 million in Danisco debt. Here are some thoughts: 1) DuPont is long overdue to make a large acquisition. A decade ago, no chemical company was making as many deals as DuPont. An often quoted figure is that DuPont racked up a total of $60 billion in acquisitions and divestitures between 1998 and 2004. It was early in Chad Holliday’s tenure as CEO and he wanted to leave his mark. He split off Conoco in 1998. (The oil glut is almost perfectly bookended by DuPont’s Conoco ownership.) He also sold off pharmaceuticals. And in 2004, DuPont divested its Invista fibers unit to Koch Industries. In 1998, DuPont purchased Hoechst’s Herberts automotive paint unit. In 1999, it bought seed maker Pioneer Hi-Bred. But since it purchased electronic chemicals maker ChemFirst in 2002, for only about $400 million, there's hardly been a peep out of the company. 2) Valuation is a tough call. Based on the $6.3 billion price tag and Danisco’s expectations for the full fiscal year ending in April, DuPont is paying 27.4x earnings and 15.4x EBIT. That strikes me as a good full valuation. It isn’t the full you feel on Thanksgiving when you doze off while watching the Lions; it’s more like Big Mac and fries at your desk full. Looked at another way, DuPont is paying 7.7x book value (equity minus intangibles), which makes the deal seem a little more expensive. 3) There are deals in DuPont’s future The primary motive for DuPont to buy Danisco is enzymes maker Genencor. The rest of Danisco is all about food. Under “Industry Events” on Danisco’s website the next event Danisco has scheduled is the Banff Pork Seminar, after that company officials are on to the Bread and Butter Tradeshow. (Check the links. These are both real things.) How deep does DuPont want to get in the food industry? Outside of Genencor, Danisco’s three major units are enablers, which are the gums and emulsiers that go into food; sweeteners, fructose and the like; and cultures, as in probiotics. None of these seems to scream DuPont, though enablers sound like the best fit in DuPont because they are very chemistry oriented. Worth mentioning: in recent years, Danisco has divested its sugar business and its flavor and fragrances unit. UPDATE: In the conference call, DuPont CEO Ellen Kullman argued that Danisco would complement DuPont’s health and nutrition business. In other words, probiotic cultures from Danisco would complement Omega-3 fatty acids and soy proteins from DuPont. Specialty food ingredients from Danisco such as emulsifiers and sweeteners...

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