DuPont Corporation Sale of Performance Coatings Harvard Case Solution & Analysis

DuPont Corporation Sale of Performance Coatings Case Study Solution

Risks for Potential Buyers:

Along with the benefits and rewards, there are some risks for potential buyers (strategic and financial buyers). The main point includes the:

  • As known that the main customers of DPC are motor vehicle sector but the decline in this sector has been observed for upcoming years
  • A rapid increase in prices of raw materials constituting 50 % product cost
  • An increase in customer’s demands for technological advancement in the operations to cut costs and increase efficiency
  • A rapid increase in total variable cost of DPC
  • Strong perfect competition in the performance coating market
  • A decline in Refinishing due to low rates of collision
  • Low GDP growth around 1 to 2% in the economy and the revenues from DPC is completely tied with GDP growth
  • Over time, a gradual increase in environmental compliance costs

Dollar Increase in DPC’s Value by PE Fund:

By considering the three given scenarios, the dollar increase in DPC enterprise value has been observed in part one at 5 % and 4 % revenue growth per annum are $ 889 and $ 0 respectively with the percentage increase by 22 % and 0 % respectively, in part two at 5 % and 4 % revenue growth per annum are $ 1132 and $ 119 respectively with the percentage increase by 29 % and 5 % respectively and in part three at 5 % and 4 % revenue growth per annum are $ 1380 and $ 413 respectively with the percentage increase by 35 % and 10 % respectively. The summary of these calculations is shown in Exhibit 1 of the document while all the calculations can be looked after in the excel spreadsheet.

Maximum Enterprise Value (EV):

If PE considers an IRR of 20% then it could offer a maximum enterprise value of $ 3755 and $ 4472 under the consideration of part A and B at 4 % and 5 % revenue growth per annum respectively. The price under part A and B with leverage and 5 % revenue growth per annum are however higher than the stand-alone value projected by the company which is $ 3970 while the price under part A and B with leverage and 4 % revenue growth per annum are lower than the estimated price of $ 3970. The summary of these calculations is shown in Exhibit 2 of the document while all the calculations can be looked after in the excel spreadsheet.

Minimum Bid Price for DPC:

The minimum bid price for DPC should not be less than the estimated stand-alone enterprise value (EV) which is $ 3970, as the lower price would reduce the shareholder’s value which the company cannot afford. The offered price, if the PE would go for purchase by using the debt which is higher than the minimum bid price showing a positive point for DuPont. Moreover, the minimum bid price through calculations for all 3 scenarios is $ 3970 which is shown in Exhibit 1 of the document.

 

Exhibit 1: Summary of 3 Scenarios

EnterpriseIncrease% of Total
Valuein ValueIncrease
Enterprise Value of Standalone $   3,970
part a.4% and 10%397000%
5% and 12%485988922%
part b.4% and 10%41691995%
5% and 12%5102113229%
part c.4% and 10%438341310%
5% and 12%5350138035%

Exhibit 2: Target Return of 20 %

PE Firm’s Valuation of DPC (4 % Revenue Growth per annum)
Target rate20%
Closing2012E2013E2014E2015E2016E
RCFs (used to pay off debt) $       3,926 $          138 $        153 $        168 $        181 $      203
Enterprise Value $   4,383
Debt Balance at 2016 $   2,519
Total CFs to Equity $          138 $        153 $        168 $        181 $   2,067
Maximum LBO Equity Contribution $       1,237
Add: Net Debt (no excess cash) $       2,519
Implied Enterprise Value for DPC $       3,755

 

PE Firm’s Valuation of DPC (5 % Revenue Growth per annum)
Target rate20%
Closing2012E2013E2014E2015E2016E
RCFs (used to pay off debt) $       3,926 $          174 $          197 $          221 $          243 $      276
Enterprise Value $   5,350
Debt Balance at 2016 $   2,816
Total CFs to Equity $          174 $          197 $          221 $          243 $   2,810
Maximum LBO Equity Contribution $       1,656
Add: Net Debt (no excess cash) $       2,816
Implied Enterprise Value for DPC $       4,472

 

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