Question

1. Assess DPC’s fit within DuPont. What are its prospects going forward as a division within DuPont versus its potential value to an outside party?

2. How attractive is DPC as an acquisition from a strategic buyer’s or PE firm’s perspective? What are the potential risks to such a deal?

Answer 1

Going forward, the DPC division will benefit a third party more than DuPont. The lowest of the eight business units, DPC's expected sales growth rate over the next two years is expected to be 3-5%.

1. Despite its sales rebound from 2009, which was attributed to price increases that were unlikely to continue. Among the business units, DPC also has the lowest profit margins. Additionally, operating margins were becoming more difficult to achieve as a result of rising input costs (50 percent of essential raw material inputs were linked to rising crude oil prices as a result of tight supply and improving economic conditions). Additionally, the highly fragmented and increasingly consolidated global industrial coatings market makes it more challenging for DuPont to compete on its own in the market. On top of that, DPC's competitive advantages were in the refinishing and vehicle OEM markets, which were losing market share within the division. Because fewer damaged cars were being repaired and fewer collisions occurred as a result of fewer miles driven in the U.S., OEMs' demand for paint was also declining. The firm estimates that DPC would be worth about $4 billion if it remained a part of DuPont. DPC's potential sale appears likely.
2. A strategic buyer or PE firm may find DPC to be a desirable acquisition. The potential benefits from this acquisition would include those brought on by EBITDA growth, multiple arbitrage, and the potential use of leverage, in addition to all the stand-alone advantages the division has provided, such as economies of scale and the capacity to gain a larger share of a fragmented and consolidating market. Despite being more financially risky, using leverage has some advantages, such as bigger tax breaks, higher returns for the sponsor due to the small equity base, and a rise in the sponsor's equity value (a small rise in the enterprise value of the company drives up the sponsor's equity value in highly leveraged firms).

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