Kevlar barrier

Costs of split help DuPont in activist fight

DuPont is deploying precision ordnance in its proxy fight with Nelson Peltz. The company said on Monday that the breakup plan outlined by the activist's Trian Fund Management would bring dis-synergies adding up to over $10 billion in present value. That makes Peltz's task persuading other shareholders tougher.

The $65-billion corn seed-to-Kevlar maker said it would incur $4 billion of upfront costs separating its sexier agriculture, nutrition and biosciences units from slower-growing building and safety materials. That's more than the $3 billion of one-off items Trian estimated in a September white paper, but it's in the same ballpark.

Chief Executive Ellen Kullman and her team calculate an additional $1 billion of ongoing annual costs from extra overheads, interest costs and tax complications - the flip side, essentially, of the synergies usually on offer in a merger. This amounts to about 3 per cent of the company's $34 billion of expected revenue this year. That proportion wouldn't seem out of line as the potential savings if DuPont was buying another business. Taxed and discounted to a present value, those extra costs represent something like a $7-billion hit to the company's valuation.

Even if Peltz accepted DuPont's numbers, he might think the investment is worth it. Trian has argued that the company's share price could roughly double by 2017 if it split up, rejigged its capital structure and forced managers to justify their spending from scratch - the same so-called zero-based budgeting employed effectively by investment firm 3G Capital at companies like HJ Heinz.

One issue is whether DuPont could achieve similar savings without a breakup - and if not, why investors should assume it's possible at all. The now US-focused Kraft Foods, which split from more global Oreo-maker Mondelez in 2012 under pressure from Peltz, was supposed to slash its cost base. But in recently agreeing to a merger with 3G's Heinz, the Kraft CEO said he had "not been thrilled" by his company's ability to make that happen.

Peltz has emphasised that his breakup idea is a means to an end - better performance - not the final goal of his proxy fight. DuPont's new figures, though, make it harder for him to make the financial case for a split.