Does the Dupont Deal Make Sense?

Includes: DD, DNSCY
by: Investment U

By Tony D’Altorio

Global food production may have to swell 70% by 2050 to feed the world’s growing population.

Reflecting those increases, food prices are already hitting record highs. And added demand for fuel, paired with crop-killing weather, has done its own damage.

The UN’s Food and Agricultural Organization recently reported that its food price index hit its highest level since beginning in 1990. Tracking the prices of 55 food commodities, the index just surpassed the previous record set in June 2008 during the so-called global food crisis.

All of that goes a long way towards explaining the latest major deal in the industry…

DuPont (NYSE: DD) is paying $6.3 billion for the Danish food ingredients company, Danisco ADR (OTC:DNSCY). The deal consists of $5.8 billion in cash – $115 a share – and assuming $500 million of Danisco’s debt.

DuPont Buys Danisco

DuPont is best known for its chemicals business and safety equipment products, like Kevlar bulletproof vests. But it competes in a much larger range of industries.

In 1999, it made its first big move into the food and nutrition business by buying seed company Pioneer Hi-Bred for $7.7 billion. The Danisco deal is its largest since then.

Danisco gets 65% of its sales from making additives for various foods, drinks and animal feeds. It also manufactures enzymes for detergents and industrial processes, including biofuel production.

Together, their new venture focuses on developing enzymes for bioethanol. An alternative to fossil fuels, the technology involves turning agricultural waste such as straw, wood chips and switchgrass into fuel.

They then use specially engineered enzymes instead of food products, like corn and sugar, to make cellulosic ethanol. The end-result emits less greenhouse gases than conventional ethanol and helps keep food prices lower, since it uses agricultural waste instead of food commodities like corn and sugar.

That all makes DuPont a leader in the global enzyme and biofuels industry. Only fellow Danish company Novozymes ADR (OTCPK:NVZMY) produces more in this area.

DuPont’s New Food & Nutrition Strategy

Obviously, the acquisition strengthens the company’s presence in the food ingredient and enzyme markets. It reflects DuPont’s push for more exposure to the food and nutrition industry amid rising global demand, especially from emerging markets.

DuPont is already heavily involved in the food industry through its seed business. For one, it recently launched a new type of drought-resistant corn seed.

Unlike its competitor, Monsanto (NYSE: MON), DuPont developed them conventionally rather than by genetic modification. So they won’t need government approval, and can hit the market quickly.

This Danisco deal will help to complete DuPont’s “farm to fork” strategy, which focuses on expanding the company beyond its traditional chemical and manufacturing focus. Instead, it focuses strongly on the agribusiness and alternative energy sectors.

DuPont sees growing demand for food and clean energy as two of the world’s biggest challenges. Its CEO, Ellen Kullman, said, “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.”

Does the Deal Make Sense?

Wall Street immediately reacted negatively to the deal, selling the stock off.

It thinks DuPont could better use its money than paying about 13 times historic earnings before interest, tax, depreciation and amortization. Wall Street also doesn’t like that, since the two companies have different focuses, there will be few cost synergies.

But 208-year old DuPont has a rich history of changing its focus…

  • It produced much of the gunpowder used in WWI,
  • Invented nylon and Teflon,
  • And held a controlling stake in paint customer General Motors (NYSE: GM) during the 1920s and 1930s.

The company has survived over two centuries by foreseeing change and adapting to it. And its current CEO seems to be doing just the same… despite Wall Street’s obsession with the familiar.

DuPont sagely moved into seeds and biofuels in 1999 by buying seed company Pioneer. Ms. Kullman now wants to pursue those areas further to profit from “megatrends,” a future of rapid population growth and dwindling natural resources.

Oil prices are near $90 a barrel and food prices are at record highs. If they continue trending upwards, both Kullman and DuPont will come out ahead once again.

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