In the first quarter of 2012, the CEO and chairman of DuPont Corporation, Ellen Kullman, must finalize and make a decision on holding on to the Performance Coatings (DPC) division of the company or to sell it. This case study allows students to compute the minimum price of DPC for bidders.
Susan Chaplinsky, Felicia C. Marston, Brett Merker
Harvard Business Review (UV6790-PDF-ENG)
February 07, 2014
Case questions answered:
What is the minimum price of DuPont Corporation for bidders?
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Case answers for DuPont Corporation: Sale of Performance Coatings
This case solution includes an Excel file with calculations.
DuPont Corporation Performance Coatings
The appeal of divesting DuPont Corporation Performance Coatings (DPC) is set in the potential for a leveraged buyout (LBO) and the value created through such an acquisition. The auto market counts for 80% of DPC’s revenue, with drivers of sales being vehicle collisions and car production.
Due to the declining trends in the refinishing market and increased cost of raw materials, the division’s expected growth and margins have not met DuPont’s long-term performance targets.
DPC’s product strategy focuses on auto original equipment manufacturers (OEMs) and refinishing coatings. A misalignment with DuPont’s corporate strategy to transition into a science-focused product business. Hence, the sale consideration is expected to create a greater value for shareholders instead of operating DPC internally as a stand-alone division under DuPont.
DuPont Corporation is the fourth largest company globally in the coating industry. DPC’s sales are heavily correlated to macro-economic conditions. In the United States and European markets, space for sales growth has been limited due to market saturation. To achieve higher sales, attention to emerging markets and new regions may prove lucrative.
The sale of DPC would generate interest, particularly from its competitors. Due to the tight competition in the coating industry, premier companies have sought resource integration to expand their market share.
For Private Equity (PE) investors, DPC, as a mature and stable incumbent with foreseeable future performance, is an investment target eligible for LBO with DPC’s current zero-debt capital structure.
From the historical performance and demands of market and industry comparable companies, the firm’s expectations and buyout financiers can be synthesized. DPC’s current underperformance is tied to operational inefficiencies.
During the 2008-2009 economic recession, DPC experienced a decline of 21.4% to its year-on-year growth rate and increased production costs of the coating due to crude oil price volatility.
It is expected that this will limit DuPont Corporation’s operating margin growth to several percent. Hence, DPC’s growth in the 1-5-year term will increase revenues and improved operating efficiencies. Projected in the ranges seen in Table 1. All other factors of DPC’s operation are projected to remain as is.
Table 1 – DPC’s Operating Rates
DuPont Corporation operates with a high revenue/EBITDA multiple, relative to market comparables, of 12x. A buyout firm will look to reduce this, along the modeled trend. Achieving a…