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.
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 would benefit from DuPont’s “application development skills”.
When Frant Mitsch of BB&T asked about “cleaving off” businesses, Kullman said “we just got this thing agreed to last night.” She added, “I am very excited about the prospects of what Danisco brings us.”