Trian Makes Case to Break Up DuPont Activist Wants to Split Off Faster-Growing Agriculture, Nutrition Units By DAVID BENOIT and JACOB BUNGE CONNECT September 16, 2014
An activist investor with a successful track record has launched a campaign to force DuPont Co. DD +0.07% to break itself up after the 212-year-old chemical giant rebuffed its repeated private calls for change.
Trian Fund Management LP plans to seek support from other investors for its push to dismantle the company, according to a letter it sent DuPont's board Tuesday that was reviewed by The Wall Street Journal. Trian said it plans to release the letter widely after more than a year of unsuccessful private efforts to persuade.
Trian has a $1.6 billion DuPont stake, according to the letter, which would make it a top-10 holder in the Delaware company with nearly 3% of the stock, according to recent disclosures. Trian first invested more than $1 billion in DuPont in early 2013, and it added to its position recently when the stock fell after the company cut its earnings guidance.
DuPont said it welcomes shareholder communications and has had "constructive dialogue with Trian." It added that it is committed to its plans to cut costs and to "enhance value for all DuPont shareholders."
The escalating battle pits one of Wall Street's most successful activist firms against a bastion of American industry whose roots date back to 1802, when founder E.I. du Pont built gunpowder mills in Delaware.
Trian argues that an overly complex and bloated corporate structure overburdens DuPont's seven business lines, some of which the activist firm argues bear little relation to one another, making it difficult for both investors and the company itself to gauge its prospects.
Trian already has the support of another significant shareholder. The California State Teachers' Retirement System, or Calstrs, cosigned earlier letters reviewed by the Journal that Trian wrote to DuPont. Calstrs owns about a $250 million stake in DuPont, the letters said. The pension fund, which has worked with activists successfully in the past to push companies to break up, is an investor in Trian funds.
Trian's argument to DuPont is similar to ones it has successfully pressed at other companies, including Kraft Foods Inc. and Ingersoll-Rand IR -1.45% PLC: Create one public company made up of faster-growing segments—in DuPont's case that would include its agriculture and nutrition businesses—and create another with operations that generate strong cash flows, which would include specialty-chemical products, Kevlar body armor and Tyvek construction materials.
DuPont is already shedding a business known as performance chemicals that makes household paint and Teflon. While Trian supports that move, it's calling for more. "These actions are not moving the needle," Trian co-founder Nelson Peltz said in an interview. "It's not dealing with the problem."
DuPont CEO Ellen Kullman is already shedding a business that makes household paint and Teflon. Bloomberg
Trian said its plan would eliminate $2 billion to $4 billion in annual costs. It would also enable DuPont's separated units to improve performance because they would be less bound by corporate red tape and better motivated and focused, the firm said.
Trian, which has taken particular aim at a DuPont corporate theater, country club and hotel, said the moves could double the value of the company's stock over three years.
Ed Garden, Trian's chief investment officer and co-founder, said the portfolio is "overly complex" to manage. "This will be an analysis that gets everybody thinking," he said.
Trian said it's taking the campaign public after DuPont rejected its suggestions during private meetings and declined repeated requests for board representation. DuPont is one of Trian's three biggest positions, alongside stakes in Mondelez International Inc. and PepsiCo Inc. PEP +0.45%
DuPont Chief Executive Ellen Kullman has said a transformation is already under way at DuPont. Last October, the company announced the plan to spin off its performance-chemicals business, a slower-growing unit that makes up nearly 20% of revenue. Following that move, Trian told DuPont privately that it would give the company time to hit financial forecasts, according to Trian's letter.
But in June, DuPont lowered its expectations for full-year profits, the latest in what Trian considers a string of misses by the company's management. Trian again sought to gain board representation and was rebuffed, the latest letter said.
Trian executives said they would consider launching a proxy fight for representation on DuPont's board or, if necessary, a nonbinding shareholder vote to push the company to explore a breakup.
Trian may not succeed in a campaign to win over other DuPont shareholders. The stock is up by about 160% since Ms. Kullman took over as CEO in January 2009, outpacing the gain in the S&P 500 stock index. DuPont shares rose 0.8% Tuesday to $65.83, giving it a market capitalization of about $60 billion.
Ms. Kullman has won plaudits for helping the company recover from the financial crisis, which ate into demand for its construction and other products, and investors have supported DuPont's moves to sell or spin off lower-profit divisions over the past two years.
Ms. Kullman and DuPont have argued that even seemingly unrelated businesses can benefit from cross-selling products and drawing on a deeper pool of corporate research and development. She has pointed to an insecticide called Rynaxypyr and a carpet fiber made from corn stalks. DuPont has also planned a $5 billion share buyback and pledged to cut $1 billion in annual costs.
Some analysts have questioned how regularly the company's R&D produces meaningful breakthroughs, and Trian said it doesn't justify keeping DuPont together.
Trian points as evidence for its argument to DuPont's 2013 sale of its specialty-coatings unit to private-equity firm Carlyle Group LP for $4.9 billion. Carlyle last month filed to take that company public after significantly boosting earnings—a sign, Trian said, of the potential for breaking up the rest of DuPont.
Trian's plan calls for one company composed of the agriculture, nutrition and health and industrial biosciences segments, faster-growing operations that involve heavy research and development costs. Another company would include the performance materials, safety and protection, and electronics and communications businesses. Those fluctuate with commodity and economic cycles, but they earn more cash that could help pay larger dividends, Trian said.
DuPont Shares Rise as Firm Placates Activist Investor Trian Activist investor Nelson Peltz's Trian Fund urges DuPont to split into two By M Rochan September 17, 2014 15:07 BST
DuPont's shares rise as firm responds to activist investor seeking its breakup.Reuters
DuPont's stock rose in early trading in New York, on news that the firm had a "constructive dialogue" with a major shareholder, Trian Fund Management, after the latter called on the chemicals giant to break itself up.
US-based DuPont's stock was trading 4.66% higher at 0947 EDT.
Earlier, DuPont, responding to Trian's campaign urging it to split into two, said in a statement: "Our board of directors and management team have taken firm action over several years that has delivered 220% total shareholder return since year-end 2008, compared to 144% for the S&P 500 during the same period...
"The board and management team remain committed to executing on our strategic plan to drive growth and profitability. The recently announced first phase of our redesign initiative to drive down costs by $1bn [£613m, €771m] and embed greater efficiencies, together with the separation of Performance Chemicals and our $5bn share repurchase program, reflect our board and management's commitment to enhance value for all DuPont shareholders.
"DuPont welcomes open communications with shareholders and values input toward our common goal of enhancing shareholder value...we have had a constructive dialogue with Trian."
Activist investor Nelson Peltz's Trian, among DuPont's largest shareholders, had asked the conglomerate to separate its high-growth businesses from those that generate strong cash flows.
Trian, which holds a $1.6bn stake in DuPont, wants the company to split into two - one holding its fast-growing agriculture, nutrition and health and industrial biosciences divisions. The other holding its cyclical businesses such as performance materials, safety and protection, electronics and communications.
Peltz said his proposal will eliminate $2bn to $4bn in annual costs and double the value of DuPont's shares over three years, saying the firm's conglomerate structure was "destroying value".
Petlz, in a 16 September letter to DuPont's board, argued that the firm's plan to hive off its performance chemical unit, which makes materials used in non-stick cookware, refrigerants and a white pigment used in toothpastes, and its stock buyback programme were "not enough to optimise shareholder value."
DuPont's stock, which finished at $65.83 on 16 September, has gained some 6.5% this year. The stock has surged some 15.5% over the past twelve months.
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