DuPont Corporation: Sale of performance Coatings Case Solution
The internal review by the CEO suggests that DPCâ€™s value showed highest value of all the divisions within DuPont, it estimated increase in sales by 3% to 5% and ultimately, increase in operating margins by 10% to 12%. Along with this, the stand-alone valuation of the DPC is estimated as $ 4 billion for the strategic buyer to invest. Most potential buyers consider this is a large amount to invest for a private equity firm. The major acquirers are PPG, BASF, Valspar, and Akzo Nobel. Their major focus in on R&D, as large amount is invested on technological innovation in their main division. Along with this, the strategic buyers focus on strong management as they make good returns from hiring the expert staff.
Potential risks to such a deal:
- High Leverage Risk:
The potential risks may include a high leverage risk, the purchase of firm will lead to increase in the debt financing. However, it has advantage of tax saving due to a decrease in the cost of debt. High leverage is highly risky for the firm, as it tends to decrease firmâ€™s total value.
- Credit Rating
Â Another potential risk is the credit rating; when a potential buyer buys a company, then the debt of both the firms increases, it has a high impact on companyâ€™s credit rating. It is linked with the high leverage risk i.e higher debt means greater chance of default.
3.Â Â Â Â Â How attractive is DPC as an acquisition from a PE firmâ€™s perspective? What are the potential risks to such a deal?
The acquisition value of DPC from the PE firm’s perspective is measured by the stand-alone value of the company, which is measured by growth in EBITDA and the purchase price multiples in every year. The EBITDA is estimated through the product expansion, cost reduction, and add-on the acquisition.
The stand-alone is a potential source to value PE firm by using the leverage after acquiring it would decrease the taxes. However, the total debt for both the companies would increase, so there may be an increase in the solvency risk.
On the other hand, PE evaluate their EBITDA to acquire the firm, it is estimated that the EBITDA will increase by 5.5 to 6 times, which will help improve operating plan and result in better results.
The other is purchase price multiples that improve the credit rating, if the debt increases for both firms after the merge. Along with this, it provides access to future debt at the cheaper rate.
Potential risks in such a deal:
- Debt to EBITDA:
The previous trend shows that the Debt to EBITDA decreased sharply from 7.6 to 3.3 times from 2009 to 2011 respectively, due to large equity contributions from the investors along with the increase in the debt multiple that increased by 6.2 times in 2011.
- Large debt:
The PE firm already has 60% debt on average from 2010 to 2011, if this situation remains stable, then the addition debt for purchase of DPC would be a higher amount to pay in future along with its interest expense………….
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