If a company is going to hang around for a couple of centuries, it is a good bet that it will have to change and adapt with the times. DuPont (NYSE:DD) is an excellent case in point - while grouped into the generally stodgy, boring, and cyclical "chemicals" industry group, DuPont has a rather remarkable record of remaking itself and getting involved in new growth markets. Though DuPont's record of diversification is not flawless, investors should at least be willing to give management the benefit of the doubt with this latest acquisition.
3D - DuPont's Danisco DealDuPont announced Monday morning that it would acquire Danish ingredient and enzyme company Danisco for $5.8 billion in cash and the assumption of an additional $500 million of Danisco's debt. The deal gives a better than 25% premium to Danisco shareholders and will likely produce more than 10% earnings dilution for DuPont in the first year.
As has already been widely reported, this is an unusually large deal for DuPont - the largest deal the company has done since it acquired Pioneer for nearly $8 billion more than a decade ago. That deal, though, has proven to be an exceptionally good move in hindsight, as DuPont is now one of the leading advanced seed trait companies in the world.
Some New, Some OldAbout two-thirds of Danisco's revenue comes from products for the food industry - an industry that DuPont has heretofore not been much of a focus for the company. In addition to a sweeteners business that competes with the likes of Tate and Lyle (Nasdaq:TATYY), Danisco sells a host of so-called "enablers" that include emulsifiers, stabilizers, flavor enhancers, and so on. In more practical terms, when you buy a bottle of salad dressing and it stays shelf-stable for weeks, that is because of the kinds of products Danisco produces.
Food is not often thought of as a growth industry, and it is true that companies like International Flavors and Fragrances (NYSE:IFF), Kellogg (NYSE:K), and McCormick (NYSE:MKC) do not excite the growth crowd. By the same token, though, there is more growth here than many realize. Danone's (Nasdaq:DANOY) Activia yogurt product has been a big seller, and Danisco has a sizable cultures business. Moreover, more and more foods that were previously sold only "fresh" (in the refrigerated/frozen sections) or dehydrated are migrating to the center aisles of the grocery stores, and that is also because of the kinds of products Danisco produces
While much of the Danisco business will be new to DuPont, it is not altogether unfamiliar. DuPont and Danisco have been working together on enzymes related to bioethanol, and Danisco's promising industrial enzymes business has to be at least some of the logic of the deal. In other words, companies like Novozymes (Nasdaq:NVZMY) and Amyris (Nasdaq: AMRS) cannot be altogether thrilled with this deal - sure, it validates the growth potential of their markets, but it also gives them a very well-heeled competitor.
Ample Opportunities to ImproveAlthough DuPont shareholders don't seem overly thrilled with the deal (judging by the initial trading action in the shares), this looks like a promising long-term investment. Not only does it seem like a logical extension to DuPont's existing businesses in agriculture and biofuels, but it gives the company new growth markets and new customers. Moreover, Danisco carries some of the less-desirable legacies of an old European company - it has a lot of facilities spread over the world and does not operate in an especially lean fashion. Figure on DuPont addressing this relatively quickly and squeezing cost savings or synergies from it.
The Bottom LineIt is not every day that a company like DuPont can make a meaningful deal that delivers leadership positions in several sizable markets. Though it is likely true that this deal will not dramatically impact DuPont's growth rate in the near term, it will nevertheless add some growth and it will further broaden the company's base of business - a positive for more conservative investors who value DuPont for its long stream of dividend payments.
