DuPont to Sell Automotive & Industrial Coatings Unit to Carlyle Group

by Trefis Team
+4.96%
Upside
68.60
Market
72.00
Trefis
DD
DuPont
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DuPont (NYSE:DD) recently finalized an agreement with private equity firm Carlyle Group over the sale of its Automotive & Industrial Coatings unit. The deal is worth around $5.15 billion, which includes $4.9 billion in cash and the assumption of $250 million worth of unfunded pension liabilities by Carlyle. The transaction is expected to conclude in the first quarter of 2013. [1]

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Carlyle outmatched bids from Apollo Global Management and a joint offer from KKR & Co. and Onex Corp. The deal valued the unit at 7.8 times its EBITDA.

Division has Lowest Margins and Revenue Growth in the Company

The automotive & industrial coatings unit sells its products to motor vehicle OEMs (Original Equipment Manufacturers), automotive after markets and auto repair shops.The division has well established brands such as DuPont Standox®, which is reputed as being one of the highest quality names in the auto-paint business. However, revenue growth for the division has been sluggish, and it has the lowest margins among all of DuPont’s operating segments.

Revenues from the division have grown at a CAGR of around -1% from 2007 to 2011, while the company as a whole had revenue growth of 5.4% during the same period. DuPont targets annual revenue growth of 7% in the long-term, and the divestment of this division could enable the company to direct resources towards faster growing businesses with higher margins, such as Agricultural and Nutrition Products, which grew at a CAGR of almost 14% during the same period, and has the potential to continue such high growth rates considering the rapidly growing market for the products worldwide.

The division had an EBITDA margin of around 6.5% last year, which is the lowest among all of the company’s divisions. DuPont had an overall EBITDA margin of 17% in the previous year. We expect overall margins for the company to improve substantially following this divestiture, driven by businesses like Performance and Safety Materials, which has impressive EBITDA margins of around 19%.

Divestiture in Line With Long-Term Strategy

Apart from reasons relating to revenue and margin growth, the divestiture allows DuPont to build on its long-term strategy of focusing on the interlinked businesses of agriculture, nutrition, bio-industrials and advanced materials. The company purchased Danisco in 2011, which improves its capabilities and market share in agriculture and bio-industrials. It is also focusing on its nutrition products division in India [2], where companies such as Heinz (NYSE:HNZ) have seen strong growth.

We currently have a Trefis price estimate of  $50 for DuPont, which is in line with the market price. We will be updating the model to reflect the impact of the divestiture.

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Notes:
  1. The Carlyle Group to Buy DuPont Performance Coatings Business for $4.9 Billion, DuPont, August 2012 []
  2. DuPont to expand food business in India, The Hindu Business Line, September 2012 []
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