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Carlyle to Buy DuPont’s Auto-Paint Unit for $4.9 Billion

August 30, 2012

Carlyle Group to Buy DuPont’s Auto-Paint Unit for $4.9 Billion

A worker sprays an undercoat on a Dodge Durango body at Chrysler Group's Newark Assembly Plant in Newark, DE in 2002. Chrysler worked with its supplier, DuPont, to use the clear coat paint, which is the final protective paint layer for the Dodge Durangos. Photographer:Don Murray/Getty Images

Carlyle Group LP (CG:US), the world’s second-largest private equity firm, agreed to acquire DuPont Co.’s auto-paint unit for $4.9 billion, giving it control of the second-biggest maker of coatings for cars and trucks.

Carlyle will fund its investment with equity from Carlyle Partners V and Carlyle Europe Partners III, the companies said today in a joint statement. The transaction value is $5.15 billion including Carlyle’s assumption of $250 million in unfunded European pension liabilities, DuPont Chief Financial Officer Nicholas Fanandakis said on a conference call.

The sale marks DuPont’s exit from the auto-paints market, which it has served since the advent of the motor car. U.S. auto output is still less than its pre-recession peak while the price of titanium dioxide, a raw material used in paint, has surged. DuPont Chairman and Chief Executive Officer Ellen Kullman is focusing on other industries such as food and biofuels. DuPont hired Credit Suisse Group AG in October to seek buyers for the unit, people familiar with the matter said at the time.

Kullman told investors in December that she would give the business, which has the company’s narrowest profit margin, a chance to meet company targets. Wilmington, Delaware-based DuPont’s long-term goals for coatings included sales rising by 3 percent to 5 percent annually, the smallest targeted rise among the company’s eight divisions.

“DuPont is striking while the iron is hot,” Jake Dollarhide, CEO at Longbow Asset Management Co. in Tulsa, Oklahoma, said in an interview. “There is a lot of hunger from private equity right now.”

Apollo’s Withdrawal

Carlyle has been the most active buyer among the three largest private-equity firms this year, agreeing to acquire at least $16 billion of assets, according to data compiled by Bloomberg. Blackstone Group LP (BX:US), the largest buyout firm, has been involved in $6.8 billion of purchases, while Apollo Global Management LLC (APO:US), the third-biggest, has agreed to buy $7.9 billion of assets, the data show.

At least three other private-equity firms competed for the auto-paint unit. Apollo withdrew from the bidding after declining to top Carlyle’s offer, a person with knowledge of the matter said Aug. 8. KKR & Co. and Onex Corp. ended a joint bid, two people with knowledge of the matter said Aug. 1.

Largest Deal

The DuPont deal will close in the first quarter of 2013, subject to regulatory approvals, the companies said. It would be the largest in the coatings industry globally in at least a decade, according to data compiled by Bloomberg. The next biggest was PPG Industries Inc. (PPG:US)’s 2.2 billion-euro ($2.76 billion) acquisition of SigmaKalon Group BV in 2008.

The DuPont auto-paint unit, which employs more than 11,000 people, saw second-quarter pretax operating income (DD:US) climb 26 percent to $92 million as revenue fell 1.4 percent to $1.09 billion. Sales will be more than $4 billion this year, Carlyle and DuPont said in their statement.

Coatings in the last 12 months generated “slightly less than” $500 million in earnings before interest, taxes, depreciation and amortization, Fanandakis said on a call with reporters. Carlyle is paying at least 10 times ebitda, he said. Coatings acquisitions averaged 9.7 times ebitda in the past decade, according to data compiled by Bloomberg on 13 deals exceeding $100 million.

Residual Costs

The coatings unit multiple is reduced to 7.8 times ebitda after accounting for corporate costs previously allocated to the business that DuPont is retaining, Michael J. Ritzenthaler, a Minneapolis-based analyst at Piper Jaffray Cos. who rates DuPont the equivalent of a buy, said today in a report.

DuPont plans to eliminate the so-called residual costs through the company’s “productivity program,” Fanandakis said. DuPont will announce the amount of the costs in its third- quarter earnings report, he said.

From the third quarter, DuPont will report the unit’s results as earnings from discontinued operations, which it expects will be 41 cents to 47 cents a share for 2012.

DuPont became an auto-paints industry leader with its $1.9 billion acquisition of Herberts GmbH from Germany’s Hoechst GmbH in 1999. DuPont cut 1,500 coatings jobs and shut factories in Europe seven years later after the business failed to achieve financial targets.

‘Megatrend’ Focus

DuPont is the biggest producer of coatings applied to used autos, typically via body-repair shops, and the largest supplier of new-car coatings after PPG, according to Gregg Schmidt, a DuPont spokesman.

The company will use proceeds from the auto-paint sale primarily to pay down debt, Fanandakis said. A strong balance sheet helped DuPont through the financial crisis and allowed it to move quickly to acquire Danisco A/S last year, he said.

Kullman is focusing DuPont’s growth on what she calls “megatrends” arising from global population growth: Improving food quality and agricultural productivity, cutting reliance on fossil fuels, and protecting the environment and people. She expanded last year into food ingredients and biofuel enzymes with the purchase of Danisco.

“The deal announced today is a continuation of the transformation of DuPont,” Kullman said on the analyst call. “As you look at the changes in our portfolio, you will see a significant shift toward higher growth segments and more secular growth markets.”

More than 60 percent of revenue will come from “higher growth segments” after the divestiture, compared with about 40 percent in 2007, Fanandakis told reporters.

After the Carlyle deal is completed, DuPont will still sell more than $3 billion of advanced materials to the auto industry, it said today.

DuPont’s legal adviser on the transaction is Skadden Arps Slate Meagher & Flom LLP, and its financial advisers are Credit Suisse and Greenhill & Co. Its shares fell 0.7 percent to $49.58 at the close in New York.

PPG is the biggest maker of coatings for cars and trucks.

To contact the reporters on this story: Zachary R. Mider in New York at zmider1@bloomberg.net; Jack Kaskey in Houston at jkaskey@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net


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