Dupont Case Questions

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University of Richmond *

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Apr 3, 2024

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Corporate Financial Policy MGT 6432 Case 3: “DuPont Corporation: Sale of Performance Coatings” UV6790 (Darden May 2017) Case Questions You are advising Ellen Kullman, CEO and chairman of DuPont, on whether to proceed with a divestiture of a large division. Ellen wishes to know if she should keep this division under DuPont’s control or sell it to an outside party. 1. Assess DPC’s fit within DuPont. What are its prospects going forward as a division within DuPont versus its potential value to an outside party? Should it sell DPC? 2. How attractive is DPC as an acquisition from a strategic buyer’s vs. a PE firm’s perspective? What are the potential risks to such a deal? 3. What are some of the important features of APV, and why is it a useful approach for valuing an LBO? Exhibit 9 of the case study gives a stand-alone enterprise value (EV) of $3.97 billion for DPC based on these assumptions:  4% sales growth per annum (2012E-2016E)  10% EBIT margins (2012E-2016E)  7.0x Terminal EBITDA multiple Use the APV approach to estimate the increase in the EV that a PE sponsor can obtain assuming: a. Sales growth can be improved to 5% per annum (vs. baseline of 4%) in each of the next five years along with improving EBIT (operating) margins to 12% (vs. baseline of 10%). i. What is the value increase? Are these improvements achievable? b. Now assume part (a) and that the division can be sold for slightly better EBITDA multiple at 7.5x (vs. 7.0x) in five years. i. What is the value increase? Are there risks with this assumption? c. Assume part (a) and (b) and that debt financing of 6.0x forward EBITDA (2012E) can be obtained at the closing. Assume that all residual (levered) cash flow is used to pay down the LBO debt each year and that after five years, the firm will revert to an all-equity capital structure (i.e., there are no interest tax shields beyond the horizon/terminal). i. What is the value increase? To be clear, for parts (a), (b), and (c), you want to report the incremental increase in value (dollar and percentage) from each source of improvement starting with the base value of $3.97B. Describe whether these improvements are reasonable and what risks are involved. Also, discuss some of the advantages and risks of using leverage to finance the investment. 4. If a PE sponsor has a target levered return of 20% on its fund (equity contribution before their fees), what is the maximum enterprise value it can offer for DPC based on your analysis in Q3? (Hint: For this question, you will need to estimate the equity value at exit after adjusting for any remaining debt in the capital structure). 5. What minimum bid should Ellen Kullman set if she chooses to sell DPC? Why?

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