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Chemical giant DuPont (NYSE: DD ) is back in the news. After reporting a dandy first quarter, the company recently announced its completion of the much-awaited takeover of Danish food ingredient maker, Danisco. Let's have a look at the $6 billion deal.
DuPont first declared its intention to buy the Danish company in January. At the time, DuPont offered $126 per share to acquire Danisco. Unimpressed, Danisco shareholders rejected the deal.
In April, however, DuPont gave in to Danisco shareholders' demands and raised its bid to almost $133 per share, as the old chemical company geared up to strengthen its food-related product offerings. After shareholders approved, DuPont acquired 92.2% of Danisco for $132.68 per share.
Advantages of the acquisition
DuPont can now take advantage of Danisco's heavy international presence in 23 countries. DuPont, of course, is no stranger to foreign markets, but Danisco certainly offers added geographic diversity.
The deal also adds significant segment enhancement for the company. While the agricultural and nutrition segment previously contributed 31% to the company's total revenues during the quarter, that contribution is expected to top 50% once Danisco joins DuPont's fold.
Danisco specializes in the production of food ingredients, which generate 65% of its revenue. This will make DuPont compete much more efficiently with rival Monsanto (NYSE: MON ) , a leading manufacturer in the agricultural and nutrition segment. Clearly, this is the greatest impetus for the deal.
Moreover, DuPont should be able to take advantage of various synergies in the acquisition. I think its chances to achieve greater efficiency here are strong, especially considering the nature of both of these individual businesses.
Financing the deal
To pay for the acquisition, DuPont has assumed two bridge loan facilities worth $6 billion. Again, it has also issued senior notes to reduce a majority of that loan facility. Last month, the company borrowed $1 billion in short-term commercial paper. As a result, DuPont's total debt has increased from $10 billion to $12 billion this quarter. Given the stability of both businesses, but particularly DuPont, and the relative attractiveness of these new assets, I'm fine with this reasonable manageable debt load.
Meet the competition
The $674 billion U.S. chemical industry has a number of players vying for the top spot. Although DuPont has maintained a respectable position, it still faces stiff competition from Monsanto, Dow Chemical (NYSE: DOW ) and Air Products & Chemicals (NYSE: APD ) , which has also been operating in the food-processing business of late. I suspect DuPont considers this deal a way to get ahead and challenge some of its competitors on their bread-and-butter segments.
The Foolish bottom line
Keeping in mind the competition in the industry, the acquisition should be a good one for DuPont. At present, the expected returns from the acquisition seem to be supporting the rally in the stock. This is a long-term transaction and its benefit, if any, should be felt over time.