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With somewhat curious timing, DuPont (NYSE: DD ) concluded last week by announcing a planned restructuring that will make it more of a kindred spirit to agricultural products leader Monsanto (NYSE: MON ) and Syngenta AG (NYSE: SYT ) , a sizable Basel, Switzerland-based producer of seeds, herbicides, and pesticides.
Hard on the heels of the release of its third quarter results, DuPont said that its board of directors had approved a full spinoff of its underperforming performance chemicals segment. The move, which will create an entirely separate company, will likely take up to 18 months to consummate.
As I mentioned to Fools recently, the performance chemicals segment is best known for the manufacture of titanium dioxide (TiO2), a whitening agent. Its ongoing earnings softness -- its operating income contribution dropped by 38% year over year during the most recent quarter -- was based on continued pricing softness for TiO2 and other products. The unit accounted for slightly more than $7 billion of total corporate revenue in 2012.
No surprises here
The announcement of the spinoff certainly didn't arrive out of thin air. During her July conference call with analysts, CEO Ellen Kullman stated that she and her minions were studying ways of dealing with the laggard unit, and on last week's post-release call she said her team was "moving with a sense of urgency" on the issue. Truer words were never spoken: Barely 48 hours later, the decision to spin-off performance chemicals was announced.
The move will be the latest in a string of transactions that have occurred on Kullman's watch. They have transformed the company from a member in good standing of the chemicals industry to one with an agricultural and nutrition products -- seeds, pesticides, fertilizers, food ingredients, etc. -- concentration. It's a process that actually was initiated by Kullman's predecessor, Chad Holliday, who oversaw the purchase of seed developer Pioneer Hi-Bred International.
It's subsequently involved the acquisition of Denmark's Danisco, an enzymes and specialty foods company, and the purchase of the 28% interest it didn't already own in Solae, a St. Louis-based developer of soy-based ingredients. This year it sold its automobile paint unit to private equity firm Carlyle Group (NASDAQ: CG ) . And after a three-year process, it completed the acquisition of 80% of South Africa's Pennar Seed in July.
Most observers expected that performance chemicals would be sold outright next, with some prophesying a price tag near $15 billion. Some suggested that the Carlyle Group or another private equity firm could be a likely acquirer. It's probable, however, that an inability to garner an offer even remotely approaching expectations led to the spinoff decision.
Analyzing the possibilities
The key issue now becomes the extent to which DuPont's valuation will be improved as the spinoff looms larger. As an erstwhile analyst, I've completed some model building on the company, in an attempt to forecast its revenues composition between this year and 2015. In the process, I've discarded performance chemicals from the analysis and separated the agriculture- and nutrition-related units (agriculture, industrial biosciences, and nutrition and health) from the remaining industrial segments (electronics and communications, performance materials, and safety and protection).
Further, I've applied an expected growth rate to the agriculture group that's about twice that of the mid-single-digit level that I've attributed to the industrial threesome. I expect the highest revenue growth to come from agriculture itself.
In the final analysis, I'm forecasting that the agriculture and food groups will contribute about 56% of total revenues this year -- again, sans performance chemicals -- a figure that should rise to approximately 60% in 2015. Conversely, the industrial groups appear likely to generate about 44% of 2013 revenues, a share I believe will dip to near 40% in two years.
All this assumes no additional agriculture-related acquisitions or industrial unit sales, a pair of assumptions that ultimately could both be stretches. As such, I'm willing to reiterate my earlier prediction that the agriculture and nutrition group could be responsible for 65% to 75% of total revenues in the 2015 to 2016 timeframe.
If those numbers prove to be relatively accurate, DuPont will, as noted, become far more comparable to Monsanto and Syngenta than has heretofore been the case. It thus becomes worth noting that the price-earnings ratios of Monsanto and Syngenta are currently about 23.5 times and 21 times, respectively, versus DuPont's 12 times.
As such, while DuPont's shares have already risen by 35% year to date, I'd urge Fools to continue to closely monitor the company's significant and ongoing transformation.
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