(By Mani) E.I.DuPont de Nemours (NYSE:DD), generally called DuPont, shifted its mix away from the industrial segment by agreeing to sell its Performance Coatings business to the Carlyle Group for $5.15 billion, which includes the unfunded pension liabilities to be assumed by the buyer.
Performance Coatings business supplies vehicle and industrial coating systems with 2012 expected sales of more than $4 billion and more than 11,000 employees. DuPont Performance Coatings is a successful business with attractive market positions, next-generation technology and established brands. Carlyle would use its strong market presence to accelerate growth in emerging markets, particularly in China and Brazil.
"This transaction is consistent with our vision to be the world's most dynamic science company and long-term strategy of driving competitive advantages in agriculture and nutrition, advanced materials and biotechnology, which represent high-growth, high-margin opportunities," DuPont CEO Ellen Kullman said in a statement.
The sale is considered as a positive development for DuPont, a science and technology company, as it removes the company's low margin and most cost competitive business from the portfolio. The deal is also in line with DuPont's strategic shift to higher growth, more secularly advantaged growth trends in food, energy and protection.
"This transaction further shifts the mix toward "higher growth segments," with sales in Ag & Nutrition, Electronics, and Safety & Protection expected at of over 60% on a continuing operations basis vs. about 40% in 2007," Oppenheimer analyst Edward Yang wrote in a note to clients.
This sale reduces the company's exposure to auto, which accounted for 16 percent of sales in 2011. However, the company should still generate more than $3 billion in sales from the auto industry, primarily from high-performance polymers, electronics, refrigerants, and other advanced materials.
Meanwhile, DuPont plans to eliminate general corporate overhead costs that were previously allocated to Performance Coatings but are not part of the transaction. The company plans to use proceeds to strengthen the balance sheet and execute against its financial principles, taking any excess cash and providing that back to shareholders unless they have a compelling investment opportunity.
"On a net asset basis the cost basis for Performance Coatings was just under $2B. As a reminder DD purchased Herberts for $1.9B in 1998, which then made DuPont the world's largest car paint company," Yang added.
However, the deal is expected to dilute the 2013 earnings and DuPont would report results of the Performance Coatings business as discontinued operations on a retroactive basis. DuPont expects 2012 full-year earnings from discontinued operations to be in the range of 41 to 47 cents per share.
"While we believe DuPont is receiving a fair multiple (7.5x ‘12E EBITDA) for Performance Coatings, we estimate the sale will reduce 2013E EPS by 6%, or $0.30," Deutsche Bank analyst David Begleiter said in a client note.