DuPont Looks to an IPO To Shed Its Frayed Fibers Unit

Throughout its first century and then some, DuPont Co. often was synonymous in the public’s mind with gunpowder – long after the product was but a minor element in the firm’s widely diverse chemicals business. For much of its second century, DuPont’s best-known operation consisted of nylon, polyester, and other synthetic fibers – a business that the firm literally invented. Now, like gunpowder, fibers are about to become part of DuPont history. The Wilmington, Del.-based company announced in mid-February that it was exiting the fibers business, with the intention of completing the split by the end of 2003. While the seemingly favored route is an IPO, DuPont did not rule out other mechanisms, including a sale of the operation, which still ranks as the firm’s largest in terms of sales. Chemical industry analysts say that the divorce reflects the regression of a onetime star business into a commodity operation ravaged by pressures ranging from troubles in key customer markets – notably apparel, carpets, and other home furnishings – to geographical shifts in manufacture of major products to battered pricing. But the unit’s best prospects for toughing out the harsh climate, they project, may be as a publicly held stand-alone entity that can leverage its industry-leading market share to cut costs and possibly step up consolidation through acquisitions. Bruce Altman, a specialty chemicals analyst at Arthur Andersen, notes that end-user markets are roiled by the transfer of apparel production to Asia and other regions with low labor costs, a virtual “depression” in the domestic flooring industry that prevents DuPont from maintaining its Stainmaster brand, and slack times in other sectors. As a business in tatters, fibers has outlived its usefulness to the company. “DuPont is a classic specialty chemicals company,” Altman says. “It is focused on branding and R&D. That may be good for the specialty chemicals business, but it’s not necessarily good for commodity fibers. Maybe outside of DuPont, that business will fare better because it won’t have the umbrella of some costs and expenses DuPont historically likes to put around its chemicals businesses.” Mike Wheeler of A.T. Kearney says that because of low margins on fibers, DuPont has not been able to “return the cost of capital” on the business. “It’s been a drag on DuPont’s ability to grow and its ability to return its earnings on capital,” he adds. DuPont’s restructuring plan dovetails with these observations. To pave the way for its departure, the $6.5 billion-a-year fibers business was assigned to a new DuPont Textiles & Interiors subsidiary while five business “platforms” were formed around product lines characterized by growth, technology, and critical mass that were targeted for increased investment and high returns. The units focus on electronics materials; high-performance materials, such as polymers; coatings and pigments; safety and protection products; and agriculture and nutrition technologies. “A company can operate successfully for 200 years only by continually reinventing itself,” DuPont chairman and CEO Charles O. Holliday Jr. said in unveiling the restructuring. Although 2001 was a tough year across the board for DuPont – with operating earnings dropping to $1.3 billion, or $1.19 a share, from $2.9 billion, or $2.73, the year before – fibers took an especially heavy toll on results. In the fourth quarter alone, nylon sales plunged 19% from a year earlier, polyester sales 24%, and specialty fibers volume 10%, with the lines posting sharply lower operating earnings or running in the red. To counter the grim picture, Altman says, fibers “needs to be run as a profitable commodity business, and that can probably be achieved better outside of DuPont.” “The most logical move,” he adds, “is a spin-out to the public, and it may itself become essentially an industry consolidator by picking up smaller players.” Low costs are a critical part of that scenario. Wheeler says that an independent fibers firm would enjoy the scale that comes with its industry-leading size and a chance to engage in “some heavy rationalization” until it finally splits with DuPont. “It can really start in a low-cost position, which should enable it to weather the next two years fairly well,” he says. “DuPont is not always low cost,” Wheeler says. “It still keeps a fair amount of service within the product lines or business lines and it hasn’t always been the low-cost service provider. It is trying to change that now with the five growth platforms.” Wheeler also believes that an independent fibers business may look for new markets and applications beyond existing customers. “It think that as a stand-alone, it will be a fairly high priority to explore some of those possibilities through R&D,” he remarks. If establishing fibers as an independent, publicly traded company seems to make strategic sense, convincing investors to buy into a low-growth, commodity business focused on troubled markets may be a hard sell. But analysts suggest that there are few, if any, willing buyers for a one-shot divestiture. As the world’s biggest fibers producer, DuPont’s operation should command a big price tag, even with its baggage. Strategic buyers may not want to take the time, effort, and resources to turn it around, while financial buyers, who might be attracted to the cash flow prospects of a commodity operation, are turned off by its problems. For the record, DuPont said, it is considering a “full range of options” and has hired Morgan Stanley to help in the evaluation process. Shedding the fibers operation and realigning surviving businesses into five groups is the second major restructuring in less than a year by DuPont as it plays almost exclusively on its specialty chemicals strengths. In 2001, the company sold its once-promising drug business, DuPont Pharmaceuticals, to Bristol-Myers Squibb Co.