By Kerri Shannon
U.S. manufacturing group E.I. du Pont de Nemours & Co. (DD) announced Sunday it would buy Danish food ingredients company Danisco A/S (OTC:DNSOF) for $6.3 billion to broaden its presence in the fast-growing biofuels and food sectors.
DuPont will pay $5.8 billion cash and also assume $500 million in Danisco's debt. The company expects the deal to establish it as a leader in industrial biotechnology and help it successfully address global issues in food production and fossil fuel reduction.
Danisco has two well-positioned global businesses that strongly complement our current biotechnology capabilities, R&D pipeline, and specialty food ingredients, a combination that offers attractive long-term financial returns," DuPont Chief Executive Officer Ellen Kullman said Sunday in a statement. "This also would create new opportunities across other parts of the DuPont portfolio, including traditional materials science offerings.
While DuPont is best known for its chemical business and safety equipment products like Kevlar bulletproof vests, it has broadened its focus to scientifically innovative products in a wide industry range.
Danisco is mainly focused on making food ingredients, like yogurt cultures and sweeteners for ice cream, and derives 65% of its sales from that segment.
It is also a global leader in the biofuels industry. It uses specially engineered enzymes, instead of corn and sugar, to make fuel, which will prevent a continued price surge in those commodities as they are used more for alternative energy.
DuPont is offering 665 Danish kroner ($115) for each Danisco share, which represents a 25.5% premium to Friday's closing price. The company will finance the deal with $3 billion in existing cash and the remainder in debt. It'll reduce DuPont's 2011 profit estimates of $3.30 to $3.60 a share by 30 cents to 45 cents a share.
Danisco's stock rose 42% last year. In its second quarter ending December 2010, its profits rose more than expected due to cost-cutting measures and sales growth. Analysts pegged the company as an acquisition target in 2009 when it revised its shareholder voting structure in 2009.
The deal helps DuPont offset income losses from struggling pharmaceutical sales due to recent patent expiration. It also allows DuPont to enter the market niche of food additives, which smaller rival International Flavors & Fragrances Inc. (IFF) has dominated.
It's the biggest acquisition for DuPont since its $7.7 billion purchase of seed-maker Pioneer Hi-Bred International Inc. in 1999, the company's first big move into the food and nutrition business.
Jefferies & Co. analyst Laurence Alexander wrote in a note to clients that Danisco's food ingredients division will help complete DuPont's "farm to fork" strategy.
The international acquisition is also congruent with DuPont's shifting focus to emerging markets. While DuPont's overseas workforce continues to grow, its number of U.S. employees shrank by 9% from January 2005 to October 2009.
"We are a global player out to succeed in any geography where we participate in, " said Thomas M. Connelly, chief innovation officer at DuPont. "We want our resources close to where our customers are, to tailor products to their needs."
DuPont shares fell 1.47% to $49.03 Monday on the news. Danisco stock soared 23.96%.
A Global Player in 2011's Megatrends: Food and Biofuels
The newest deal is in line with DuPont's strategy to expand beyond its chemical and manufacturing focus into the "megatrend" sectors of agribusiness and alternative energy. Both industries are expected to grow rapidly in coming years as food demand and prices increase and clean energy policies gain more ground.
DuPont and Danisco are already bound in a $140 million joint venture formed in 2008 for developing bioethanol - biofuel made from non-farm crops - which Danisco has called a $75 billion market. Analysts attribute the U.S. market's multi-billion dollar potential to countries' increasing pressure to reduce greenhouse gas emissions and use more biofuels in transportation.
"Biotechnology and specialty food ingredients have the potential to change the landscape of industries, such as substituting renewable materials for fossil fuels and addressing food needs in developing economies," said DuPont's Kullman.
Danisco has been a leader in the effort to produce cellulosic ethanol from plant leftovers like straw. Cellulosic ethanol reduces greenhouse gases more than conventional ethanol and helps keep food prices lower by using agricultural waste instead of edible products like corn.
Now that DuPont has a bigger stake in the biofuels industry, new rival Novozymes A/S (OTCPK:NVZMF) said the U.S. company's market presence will help bolster an industry that's starting to get off the ground. The Danish industrial enzymes producer said there's plenty of money for research and development to benefit both companies.
"I welcome more competition in that field," Peder Holk Nielsen, head of Novozymes' enzyme division, told Reuters. "The more horses pulling on this one right now the better off we will all be because, in the short to mid-term, the task is to establish a whole new industry in the United States. A company like DuPont, with their presence in the U.S., can be a forceful entity in trying to establish that industry."
Novozymes and Danisco are two of the only names in the enzyme-provider field and have hoped for more U.S. interest in the sector. Novozymes' shares were up 3.62% Monday after the acquisition news.
DuPont is also now positioned to be a leader in a global food industry that will have to increase production by 70% by 2050 to meet worldwide demand, as prices reach new highs.
Crop-killing weather issues, increasing demand and rising fuel prices have pushed food prices to record levels, so high they are passing prices last seen during 2008's global food crisis.
A report by the United Nations' Food and Agriculture Organization last week said the group's Food Price Index hit its highest rating since it began in 1990. The index - which tracks the prices of 55 food commodities - reached 214.7 points, surpassing the previous record of 213.5 set in June 2008.
"We are entering a danger territory," said Abdolreza Abbassian, an economist with the FAO. "It will be foolish to assume this is the peak."
Agribusiness companies have been working on creating seeds that can withstand inclement weather to prevent future supply contractions, and DuPont last week launched a new kind of drought-resistant corn seed. The seed was developed through conventional methods rather than genetic modification, meaning it will not need to secure government approval and the seeds can hit the market before rivals like Monsanto Co. (MON) release their genetically engineered competition.
Developing drought-tolerant seeds will allow more land to be available for cultivation in dry U.S. states like Texas and Oklahoma, and in previously unused lands in Africa.