Shares of E. I. du Pont de Nemours & Co. jumped to their highest level in 13 years on Tuesday after the company said it’s looking to sell its once-prosperous performance chemicals business to focus on growth in agriculture and nutrition.
The announcement comes as the chemical industry shifts away from its traditional business model and toward products that help to increase crop yields and nutrition to meet the needs of a growing global population.After an initial spike above $60, DuPont shares settled at $57.12, down 5 cents.
The potential unit sale also follows recent reports that activist investor Nelson Peltz, known for taking stakes in companies and forcing change, has taken a large position in DuPont.
Wilmington, Del.-based DuPont said it’s considering a full or partial sale of the unit that makes titanium dioxide pigment and Teflon coatings, to better protect it from market volatility.
“It has to do with the cyclicality, the volatility and low growth,” DuPont chief executive officer Ellen Kullman told investors during a conference call on Tuesday.
Demand for titanium dioxide pigment is considered a barometer of economic health, given that it’s used in a wide-range of products, from sunscreen to car paint. Prices fell last year after some of the world’s largest producers restarted production that had been halted during the recession.
DuPont said sales of performance chemicals dropped about 9 per cent in the second quarter compared to last year, while volumes increased 12 per cent. That contrasts with its agriculture business, which saw 7 per cent sales growth in the second quarter ended June 30, due in part to higher seed prices.
Ms. Kullman positioned DuPont as becoming more of an “integrated science” company focused on biotechnology uses to increase crop yield and protection. DuPont also announced management changes on Tuesday to help drive that vision.
“We need to make sure what the right future of the business is,” Ms. Kullman said, adding that DuPont has been considering the potential spinoff of its performance chemicals unit for months.
Still, there was talk on Tuesday the move was spurred by an investment from Mr. Peltz, co-founder of Trian Fund Management, after reports last week that he had recently purchased a stake in DuPont. Mr. Peltz is known for taking a position in Cadbury Schweppes in 2008 and encouraging the split of its candy and beverage business. His latest project is pushing food and beverage giant PepsiCo to buy Oreo cookie maker Mondelez.
DuPont noted on Tuesday that it could pursue a different strategic alternative for each business within the performance chemicals unit. The division generated $7.2-billion in sales in 2012, or about 20 per cent of DuPont’s revenues. BGC Financial analyst Mark Gulley estimated the entire unit could be worth about $8.9-billion before tax, noting the sale was being announced “at the bottom of the cycle.”
DuPont could have trouble selling the unit given its leading position in the global market, which analysts estimate is about a 20-per-cent share and 57 per cent in North America. “We believe a transaction with another current producer of TiO2 [titanium dioxide] will be challenging,” said RBC Dominion Securities Inc. analyst Chris Nocella in a note.
However, he said other segment in the unit, including fluoro-products used in air conditioning to electronics, could be attractive to such competitors as Arkema, Honeywell and Huntsman.
As part of its shift away from traditional commodity chemical products, DuPont sold its auto paint unit last year to investment firm Carlyle Group LP for $4.9-billion. In 2011, it purchased food ingredients maker Danisco for about $6-billion. “This is another step in the transition of DuPont that has been going on for quite some time,” Gordon Reid, president and CEO of Goodreid Investment Counsel, said of DuPont’s announcement Tuesday. “They’re becoming more of a high tech science-based organization. The predictability is greater and long term earnings growth rates are better.”
Overall, DuPont reported second-quarter profit of $1.03-billion, or $1.11 per share, for the quarter ended June 30, compared to $1.17-billion, or $1.23, for the same period last year. Revenue fell 1 per cent to $9.8-billion.
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