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Inside DuPont’s $700M break-up

Katie Tabeling

DuPont has started the long road of dividing the company into three, yet again, with new leadership guiding the way to create new value to the Delaware company. | DBT FILE PHOTO BY JACOB OWENS

WILMINGTON  — As DuPont prepares for the long road of a $700 million spin-off process for its water and electronics divisions, the company is confident in its success and potential dividends for shareholders.

Last week, outgoing DuPont CEO Ed Breen and incoming CEO Lori Koch met with investors to outline the opportunity that lies ahead for the three companies. While each future company will have its own specific capital framework, Breen said that it would grant each one flexibility to pursue acquisitions to boost its portfolio.

“From a shareholder view, we believe that each company will offer a distinct and compelling investment profile appealing to different shareholder bases,” Breen told investors on May 23. “Each company will also have strong differentiated balance sheets as a foundation to execute its growth plans, which will allow prioritization of investment where the most value can be created.”

Breen will officially step down on June 1, although he will still serve as chairman of DuPont, focusing more on hiring the boards of the new companies and hiring new management teams. This is familiar territory for Breen, as he led DuPont’s merger with Dow in 2017. 

Both companies had a plethora of businesses accumulated over the years; later the company broke into Dow, DuPont and Corteva. It’s reported that the former parts of the companies are collectively worth $127 billion. Chemours spun out of the company over the years as well.

A look at the rising companies

Last week, DuPont executives remain confident that the spin-off strategy would work. As it stands today, DuPont’s electronics division is one of the largest materials providers today with products like semiconductor chips, printed circuit boards, precision parts and more. Roughly 60% of the electronics business is in semiconductors while the rest is in boosting high speed signals. Its closest competitor is Entegris, a semiconductor and other high-tech industries supplier, reported $223 million in the first quarter – that figure was adjusted for earnings before interest, taxes, depreciation, and amortization (EBITDA).

“The company is perfectly positioned to benefit from the long-term drivers inherent in the electronics space,” Koch said. “We have long-term relationships with all key semiconductor and other electronics industry [manufacturers] and a strong history of co-development and application engineering to ensure customer success.”

As for the water division, its portfolio includes intellectual property and products in ultra filtration to remove bacteria, desalination technology, and ion membranes. It also benefits from a significant recurring revenue stream to help fuel future growth. One of its closest peers, Xylem Inc, reported a net of $125 million, adjusted for EBITDA,  in the first quarter of the year.

Koch hinted to investors that ongoing technologies would give the company an edge, as it has key technologies that could focus on emerging markets like green hydrogen production and direct lithium extraction.

“One interesting fact here, is when you look at the peers there’s not a lot of overlap in the shareholder base,” Breen added. “It actually shocked me how low the percentage of overlap was. So I think that says a lot about this thing is going to rate over time. It’s just a different profile.”

A dawn for New DuPont?

Koch and other executives offered investors a closer look at what lies in store for DuPont once it spins off the two divisions. New DuPont will continue to manufacture iconic brands like Tyveck, a lightweight product that ranges in use from protective gear to industrial packaging, to bullet and knife-resistant Kevlar. The safety and protective gear division generate half of the company’s $6 billion in sales and will continue to target building products as well as PPE, as well as aerospace uses.

It will focus on health care and advanced mobility, or electric vehicles and next-generation aero engineers. In health care, New DuPont has targeted single use systems in biotech, energy storage options and EV battery support products. 

“They all have nice growth profiles associated with them, really nice EBITDA margins and really nice cash flow generation to create value,” Koch said. “We’re really excited about the health care piece of the portfolio and look to build around that, both organically and inorganically as well.”

Otherwise, the capital structure of the company will remain the same, targeting an investment-grade credit rating and a leverage target similar to where DuPont is today.

Lingering questions

One of the questions raised by investors was about the future payments related to the settlement on the contamination of so-called “forever chemicals.” Last year, DuPont, Chemours and Corteva settled a lawsuit on contamination of drinking water of Perfluoroalkyl and polyfluoroalkyl substances (PFAS) for as much as $1.18 billion.

The legacy of the PFAS lawsuit will continue to follow the new companies. Financial analysts have remained cautious of DuPont stock because of the unknown fallout of the PFAS liabilities to come on the less diversified companies.  

DuPont also expects about $60 million in dis-synergies from its break-up into three independent companies. These costs would be related to insurance, audit fees, leadership and boards. The $700 million separation costs would stem from IT separation and tax, legal and audit work.

Koch added the company was not precluded from launching a stock buy-back campaign to raise the funds to position the company for the separation, but she said DuPont will use cash on hand for the process.

“We’ll also continue to look at some small bolt-on activity to see if we can bolster the portfolios before they spin out,” she said. “Right now the focus will be on getting the separation done and getting the businesses as healthy as what they can do from an organic activity perspective if we can.”

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