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 and insulation.
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.