DuPont Corporation: Sale of Performance Coatings

1. Should Dupont revitalize and develop DPC itself or sell it? Make your argument from value 
creation point of view. 

1. As per our analysis of the case, we believe that it makes economic sense for Dupont to 
divest DPC instead of continuing to operate it on its own. This is driven by multiple reasons 
that are stated as under: 

a) The division has witnessed slow growth in the past couple of years (07-11), falling 
below the company's expectations and corresponding performance of other 
divisions 
b) Further, there are expectations of slowdown in the coming few years for the coatings 
industry with growth falling to around 3-5% which is below the company's target of 
7% growth each year  
c) While the division saw a rise of 12% in sales in 2012, it was largely attributed to rise 
in overall increase in volume that was not sustainable, making it an exception and 
hence not enough reason to be hopeful of the business 
d) The business also saw an increase in prices recently, which also helped increase 
sales, however since most contracts in the industry were long-term contracts, 
thereby making it difficult to transfer the price differences in the future  
e) It is also important for DuPont to look closely at the changing customer preferences. 
The refinishing market which formed an important part of its overall sales and was 
more profitable had been facing declining demand from the customers facing a 53% 
fall within 2 years period 

2. What are the strategic pros and cons of DPC as a potential acquisition? As a PE how hot 
would you be in bidding for DPC? 

Strategic pros of acquiring DPC:   

1. DPC held the number-four position in the global industrial coatings. 

2. The industry was maturing and consolidating, the market share of the six top 
companies increased from 28% in 2005 to 35% in 2011. 
3. Expected growth of the vehicle market: Most analysts expected that 
emerging-market growth coupled with unprecedented fleet aging would spur a 
recovery in vehicle sales on the order of 3% to 5% per year . 

FInancial pros of acquiring DPC:  

1. DPC didn’t fit the future vision of DuPont any longer and that made it a liability and 
hence could be on the market for cheap. 
2. PE firms have a lot of money since investing dried down post 2006 and 2007. 
3. PE firms looked for firms with steady cash flows, DPC provided them with the same. 
4. There were banks willing to offer leverage and hence that made it even more 
lucrative for PE firms. 
5. Also DPC was a mature firm and hence didn’t require large amounts of investments 
in R&D from the PE firm which made it an ideal candidate. Now the only thing that 

Madhur Makkar, Sarthak Goswami, Pedro Chen

 the PE firm had to focus on was restructuring i.e reducing costs to increase 
profitability. 
6. Comparing to the competitors, using PPG as a threshold. It is easy to assume that 
DPC lacks behind in margin and growth numbers. DPC’s lower margins were mostly 
the result of higher costs and overhead. Based on this assessment and other due 
diligence, sponsors might reasonably expect to increase DPC’s sales growth by 1% to 
2% and improve its operating margins by 200 to 250 basis points. Hence there is a 
huge potential of growth. 
7. There is also a potential of multiples arbitrage but then that will be true for any 
acquisition not just DPC. 

Strategic cons of acquiring DPC:   

1. Declining market size in the US and europe primarily because of less miles driven 
leading to less need of DPC products 
2. Improvements in R&D meant that the paint lasted longer and hence refurbishment 
requirements were few and far between. 
3. Insurance firms policies taking away the refurbishing market from DPC 
4. The firm’s recent performance wasn’t great either. “From 2007 to 2011, sales had 
grown at a –0.3% cumulative average growth rate (CAGR) and profits had declined at 
a –6.0% CAGR” 
5. Declining margins because of OEMs contacts didn’t let DPC transfer the cost increase 
on them. 

FInancial cons of acquiring DPC:  

1. The large ticket size of the purchase in itself was a barrier. 

2. Also after four five years it was difficult to find another PE buyer at an increased 
multiple which meant liquidity options of tis investment were limited 

If i were the PE firm I will be r​ ed hot​ on the purchase of DPC primarily because of:  

1. Financial pros outweigh all the other cons. DPC comes with steady cash flows. 
2. There is a sizable portion there to be restructured. The firm can actually be turned 
around with cost cuts and optimisation. 
3. The funds are ending their lifecycle and need to make money from a sizable 
investment. 

3. Ellen Kullman has asked you to analyze the enterprise value of DPC from PE buyer point 
of view. Suppose a PE buyer can get debt financing equal to 6.0 x forward(2012) EBITDA. 
Make realistic assumptions based on case or other data (available 2011) on potential 
improvements in growth rate, operating margin, and Terminal Value EBITDA multiple. Use 
the case Spreadsheet. Look carefully at all the formulas and build the missing formulas of 
Debt and Interest Expense in the spreadsheet. After this analysis what would you 
recommend to Ellen as a minimum bid level for selling DPC. 

Assumptions and calculations from the case: (Step by step valuation process). 
This valuation is done assuming profitability of 10%,growth of 4% and terminal EBITDA 
multiple of 7. We have varied the numbers in the end to show other cases 

Madhur Makkar, Sarthak Goswami, Pedro Chen

 1. The firm originally is entirely equity financed. 
EV/EBITDA 2012 (×) is given to be 7.3, using the EBITDA forward of 2012 as $560.22 
Mn we get EV of the firm as ​$4089.64 Mn​. All of this value is assumed to be equity 
value of the firm. 
 
2. Calculating the Debt the PE firm receives: 
The PE firm can get 6 times debt financing of the 2012 forward EBITDA 
Therefore, Debt =​ $3,361.34 Mn  
 
3. Calculating cost of capital (WACC): 
Levered cost of equity = R​f​ +
​
𝜷(1+D/E*(1-t))*(R​m​-R​f​) 
Levered cost of equity comes out to be 15.64% 
Weighted Average cost of capital = D/(D+E)*(1-t)*interest rate + E/(D+E)*Levered Cost 
of equity. It comes out to be ​10.87%. 
 
4. Calculating Interest in the income sheet: 
The interest is calculated assuming no debt is repaid using the free cash flows and 
hence interest is 6.75% of Debt equal to ​$226.89 Mn a ​ nnually 
 
5. Calculating the tax shield because of the debt interest: 
It comes out to be 25% of $226.89 Mn which is $​56.72 Mn​ Annually 
 
6. Valuation using Unlevered free cash flows at the WACC of 10.87% gives ​EV of 
$4021.67 Mn and Tax shield of $210.34 Mn. T ​ he EV with Tax shield is ​$4232.01 Mn. 
 
7. Varying the growth rate between 3% to 5% and profitability between 10% to 
12% gives us the following data table wrt EV with tax shield.  
The data table below was created using what if analysis on excel and can be found in 
the excel spreadsheet in the submission. 
 
 

  Sales Growth 
  3.00%  4.00%  5.00% 
10.00%  4,088  4,232.01  4,382.12 
EBIT margin 
11.00%  4,447.74  4,608.16  4,775.53 
12.00%  4,807.34  4,984.31  5,168.94 
 

8. Selecting the right firm value: 

The cell highlighted in yellow is the valuation done using firms targets in mind which 
is sales growth of 4% and an EBIT margin of 10%. This seems to be a pessimistic 
valuation of the division. 
 
The cell highlighted in blue is the valuation done using firms max possibilities in 
mind which is sales growth of 5% and an EBIT margin of 12%. This seems to be an 
optimistic valuation of the division. This should be used when trying to sell the firm. 

Madhur Makkar, Sarthak Goswami, Pedro Chen

 The case states that “DPC’s lower margins were mostly the result of higher costs and 
overhead. Based on this assessment and other due diligence, sponsors might 
reasonably expect to increase DPC’s sales growth by 1% to 2% and improve its 
operating margins by 200 to 250 basis points.” 
 
The cell highlighted in green is the realistic valuation done using sales growth of 4% 
and an EBIT margin of 11%. 
 
In our opinion, the target should be to sell DPC at the optimistic point of​ $5168.94 
Mn​ assuming that the PE firm will be able to restructure and improve profitability to 
12% and sales growth to 5%. And in no case should be sold below the realistic value 
of $
​ 4608.16 Mn. T​ his value is only taken into account because DPC doesn’t fit in 
DuPont’s strategy any longer. 

The minimum bid level for selling DPC should be $ ​ 4608.16 Mn 
 
4. Voluntary bonus question. Use the same assumptions as in 3. PE sets a 20% IRR target for 
its acquisition equity cash flows. It uses all cash available to pay off debt at first 5 years and 
at the end it pays off remaining debt and sells DPC. What would be the enterprise value of 
DPC for this PE buyer? 

In order to calculate the value of the firm for this PE buyer, we will first have to calculate the 
annual debt repayments using Free Cash Flow and the outstanding debt at the end of each 
year. In order to calculate this value, we created a debt schedule as shown below. 
 
Debt Schedule 
Years  2012E  2013E  2014E  2015E  2016E 

Debt Outstanding  3.361,34  3.223,28  3.067,57  2.894,52  2.705,76 

Interest Paid  226,89  217,57  207,06  195,38  182,64 

Unlevered Free Cash Flow   364,95  373,28  380,11  384,14  397,31 

Debt at end of year  3.223,28  3.067,57  2.894,52  2.705,76  2.491,09 

  
The Unlevered Free Cash Flow from each year was used to pay off the principal debt and 
interest liabilities each year. The debt outstanding at the end of 2016 was reduced from the 
Terminal cash flow. The firm was then valued using the PE firm ́s target IRR of 20%.  
Using the Unlevered FCF and adjusted Terminal Value, t​ he EV of the firm comes out to be 
$ 2.03 billion.  
The detailed calculations for the PE ́s valuation are present in the attached Excel file.  
 
Using an alternative method, we decided to value DPC ́s post-debt EV by assuming that the 
debt repayments were equal to the unlevered cash flows of each year. Using this 
assumption, we first added the amount of debt raised by the PE and then settled the cash 
flows of each year with the debt repayments.  
The final repayment at the end of fifth year was settled with the Terminal Value of fifth year 
to finally reach an E ​ V of 3.7 bn.  

Madhur Makkar, Sarthak Goswami, Pedro Chen

Madhur Makkar, Sarthak Goswami, Pedro Chen