Trian Fund Management LP won’t stay quiet any longer. After investing over a billion dollars in E I Du Pont De Nemours And Co (NYSE:DD) in early 2013, the fund now holds a roughly $1.6 billion stake in the 212-year old chemical giant based in Delaware. That stake represents roughly 3% of the company’s stock and has Trian firmly entrenched as a top-10 stockholder.
Trian is one of Wall Street’s most successful activist interests and has been calling on the company privately to split-up its seven major business lines that it believes are suffering from a an overly complex corporate structure. Now, Trian is promising to to take its fight with the DuPont hierarchy public while seeking support of other investors according to a letter that it sent to to DuPont’s board on Tuesday. The letter was confirmed and reviewed by David Benoit of The Wall Street Journal.
Dupont – Be smart, be two companies
Trian likes to throw its weight around and has successfully done so with Ingersoll-Rand and Kraft Foods. The fund’s argument with DuPont is similar to the one it had with the aforementioned companies; it simply wants to see DuPont to create a single public company comprised of its faster-growing segments and another that generates strong cash flows. In the case of DuPont, that would mean one company made up of its agriculture and nutrition businesses and another led by specialty-chemical products, namely its Tyvek construction materials and Kevlar body armor.
DuPont claim it has a “constructive dialogue with Trian” and that it wishes to “enhance value for all DuPont shareholders,” that however doesn’t jibe with Tuesday’s letter that Trian sent to its board.
Trian presently enjoys the support of the California State Teachers’ Retirement System, or Calstrs, who has cosigned other letters to DuPont’s board and holds a $250 million stake in the company.
Last October, DuPont agreed to spin-off of its “performance chemicals” division but that’s not enough for Trian. “These actions are not moving the needle,” Trian co-founder Nelson Peltz said in an interview. “It’s not dealing with the problem.”
Dupont – Potential proxy battle for representation?
Trian continues to argue that DuPont is a dinosaur and overburdened with corporate red tape and is looking to cut somewhere between $2 billion and $4 billion in annual costs while allowing the separated units to excel on their own. Ed Garden, co-founder of Trian and chief investment officer has called DuPont’s portfolio “overly complex.”
Despite claims that DuPont listens to Trian, the company has repeatedly declined to grant the fund board representation. The latest instance of the fund being rebuffed came in June when DuPont lowered its full-year guidance.
While Trian execs suggest that the company is not afraid of a proxy battle for board representation, it will face an uphill battle to win over major shareholders. Since Chief Executive Ellen Kullman took over the chemical giant in 2009, the stock is up roughly 160%, a gain that outpaced the S&P 500 stock index over the same time period.
Dupont – Deutsceh Bank
In a September 17th 2014 research note, analysts from Deutsche Bank lend merit to both sides, noting:
We believe Trian has a strong case with respect to its break-up proposal as DuPont has, in our view, done a poor job of quantifying the benefits / synergies of having its Ag, Nutrion & Health, Industrial BioSciences businesses in the same portfolio as its Materials businesses. That said, we believe Trian faces an uphill battle in getting its plan approved. In DuPont’s favor are a number of actions over the past 3 years that have substantially improved the company and the share price.
The full letter from Trian has been posted by WSJ, readers can find it below.
TRIAN PARTNERS DELIVERS LETTER AND WHITE PAPER SUMMARY
TO DUPONT BOARD
Says Conglomerate Structure Is Destroying Shareholder Value;
Suggests Initiatives It Believes Can Double Share Value In Three Years;
Plans To Meet With DuPont Shareholders
NEW YORK, September 17, 2014 – Trian Fund Management, L.P. (“Trian”), whose investment funds beneficially own approximately $1.6 billion of the outstanding shares of E. I. du Pont de Nemours and Company (NYSE: DD), today said it has sent a letter to DuPont’s Board of Directors analyzing how DuPont’s conglomerate structure is destroying shareholder value. The letter and accompanying White Paper Summary also detail initiatives DuPont should take that Trian believes could significantly improve DuPont’s financial performance and double the value of its common stock within three years. Trian plans to meet with DuPont shareholders to present its analysis and strongly recommends that the DuPont Board meet shareholders without management present to hear their views.
Trian’s letter to the DuPont Board is below (Dupont has already responded and their response can be found here).
September 16, 2014
By Federal Express and email c/o Erik.T.Hoover@dupont.com The Board of Directors
c/o Corporate Secretary DuPont Company 1007 Market Street D-9058
Wilmington, DE 19898
Dear Members of the Board:
Investment funds managed by Trian Fund Management, L.P. (collectively, “Trian”) currently beneficially own approximately $1.6 billion of the outstanding shares of E. I. du Pont de Nemours and Company
(“DuPont” or the “Company”), making Trian one of DuPont’s largest shareholders.
As you know, Trian has engaged in a private dialogue for more than a year with DuPont’s management and the Lead Director regarding specific initiatives we believe can significantly improve the Company’s financial performance. While we applaud the announced spin-off of Performance Chemicals, the Fresh Start initiative and the $5 billion share buyback authorization, we believe strongly that, by themselves, these moves are not enough to optimize shareholder value. We would have preferred to continue working privately with management and the Board, but it is now clear that the Board is not willing to hold management accountable for continuing underperformance and repeated failures to deliver promised revenue and earnings targets. Therefore, we can no longer be silent as DuPont continues to struggle to execute what we are convinced is a flawed business plan, especially as we have a solution that we believe could double the value of DuPont’s shares over the next three years.
Trian believes the reason for DuPont’s persistent underperformance is very simple: DuPont’s conglomerate structure is destroying value. Even after the spin-off of Performance Chemicals, which is expected to be completed in mid-2015, DuPont will remain an inefficient conglomerate characterized by:
- Excessive holding company costs – we estimate $2 to $4 billion of excess corporate costs including $1
billion of publicly disclosed unallocated corporate expenses (corporate expenses include the maintenance of a country club, a 1,252-seat theatre and a 217-room hotel).1
- Disparate businesses and overwhelming complexity have rendered the management team incapable of meeting its own guidance.
- Bureaucracy and a lack of accountability have led to below-peer organic revenue growth and margins in most segments.
- An inefficient capital structure limits total shareholder returns (TSR) over time.
- A persistent conglomerate discount because it is neither a pure-play growth company, nor a cyclical recovery play nor a capital return story. Importantly, it fails to deliver low EPS volatility and strong EPS growth, the fundamental