DuPont Corporation: Sale of Performance Coatings
(All 10 groups will be submitting a 2-page writeup to address the questions below. You can respond by answering the questions on an itemized basis. You can include appendices in addition to the 2 pages. Any additional files (e.g., an Excel file) can be submitted as a separate appendix attachment.)
1. Assess DPC’s fit within DuPont. What are its prospects going forward as a division within DuPont versus its potential value to an outside party?
2. How attractive is DPC as an acquisition from a strategic buyer’s or PE firm’s perspective? What are the potential risks to such a deal?
3. What are some of the important features of APV, and why is it a useful approach for valuing an LBO?
4. Working from case Exhibit 9, relative to the stand-alone value, estimate the dollar increase in DPC’s value if a PE fund can obtain:
a. 5% revenue growth per annum (versus 4% growth) in each of the next five years and improve the operating margin to 12% (versus 10%)
b. Assume part a and that the division can be sold at 7.5x EBITDA in five years.
c. Assume part a and part b and that debt financing equal to 6.0x forward EBITDA can be obtained. Assume that all cash available to pay debt each year (i.e., residual cash flow) is used to pay down the LBO debt and that, after five years, the firm will revert to an allequity firm.
d. What are some of the advantages and risks of using leverage to finance the investment?
5. If a PE sponsor has a target return of 20% on its funds (equity contribution), what is the maximum enterprise value it can offer for DPC under parts b and c above? 6. What minimum bid should Ellen Kullman set if she chooses to sell DPC?
DuPont Case Study
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November 21, 2022
1 Assess DPC's fit within DuPont. What are its prospects going forward as a division within DuPont versus its potential value to an outside party?
The case above shows a shift in the company’s perspective, ushered by the company’s CEO, Ellen Kullman, in line with the business circumstances happening within the company. As provided in the case, one of the main priorities of Kullman was the shift towards specialty chemicals and science-based goods from the firm’s original focus on chemicals. However, one of the most notable things in this case, relative to Kullman’s goal, was the company’s motivation to increase its operating margins and annual revenue growth from 10% to 12% and 3% to 5%, respectively. In line with these goals, I believe it is an excellent move to divest DPC rather than continue with its operations.
Notably, it could be seen that market realities would suggest an overly competitive market and increasing costs. One example of this is the difficulty in achieving operating margin goals due to the fact that “nearly 50% of the key raw-material inputs (e.g., hydrocarbon solvents and organic pigments) were tied to crude oil price”. Another example of this was the increasing consolidation and competitiveness in the global market, ushered by the sharp decline in economic conditions. Finally, the case also showed that even the refini...
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