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DuPont Could Sell Coatings Division to Carlyle Group in $4.5 Billion Deal

posted Aug 18, 2012, 6:06 PM by Jonny Arkin
The Carlyle Group has emerged as the frontrunner in the buyout of DuPont's ( DD ) Automotive and Industrial Coatings division. It recently upped its bid to over $4.5 billion, with rival bidder Apollo Global Management LLC declining to match the offer.

We estimate that the Automotive and Industrial Coatings division makes up around 5% of DuPont's total value, based on the cash flows it can potentially generate. The division is one of the world's leading automotive coatings suppliers. It manufactures high performance liquid and powder coatings for motor vehicle component manufacturers, the motor vehicle aftermarket, and general industrial applications such as pipes andinsulation.

The Automotive and Industrial Coatings division has several large customers in the motor vehicle equipment manufacturer supply chain, many of whom have long-standing relationships with the company. DuPont also has a major research facility and a number of manufacturing facilities dedicated to coatings. Further value is added through synergies from backward integration, as DuPont is a manufacturer of Titanium Oxide, a raw material in the production of coatings.

As of 2011, the division generated over 75% of its revenues from outside the US. The division has shown a robust recovery since 2009, mainly due to the large increase in demand for industrial coatings.

We estimate that the global market for industrial coatings will grow to a size of around $110 billion by 2019, with the division's market share growing to around 5.3% by then (it is currently 4.6%). In 2011, the division reported an EBITDA margin of 6.5%, which is relatively low compared to divisions such as Performance and Safety Materials (19.2%) and Agriculture and Nutrition Based Products (15.3%). This reflects high operating costs, which is partly due to raw material price increases. Margins are expected to improve marginally to 7.3% over the forecast period as a result of volume increases and the resulting economies of scale. Based on these growth estimates, we estimate the value of the division to be around $2.8 billion.

Carlyle Group Looks to Unlock Hidden Value

Our $2.8 billion dollar valuation of the division is considerably lower than the $4.5 billion which Carlyle group is apparently paying for it. This could be due to a number of reasons. The group may have more optimistic growth estimates for the market size, the division's market share, and the potential increase in margins. For example, if the firm believes that the market for automotive coatings will grow at a higher rate, to say around $130 billion by 2019, and that the division has the potential to increase margins to around 8% and market share to 7% by then, a $4.5 billion valuation is appropriate. However, the firm will believe that they can unlock hidden value worth more than the estimated $4.5 billion. They could potentially achieve this by hiring superior talent for management, funding an expansion through low cost debt, or by leveraging any past acquisitions to create synergies which either lead to higher revenues or lower costs.

DuPont Would be Happy to Sell

From DuPont's perspective, $4.5 billion for this division is definitely more than they were expecting. They would be ready to spin off this division, take the cash, and invest it in the rapidly growing agricultural or nutritional products divisions, or in the industrial biosciences division, which is still at a relatively early stage and will require large capital expenditures to realize its potential.

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