DuPont Risks Dow Industrials Legacy as Transformation Looms

Updated from 10 a.m. ET to include CEO comments and afternoon share prices

NEW YORK ( TheStreet) -- E I Du Pont De Nemours ( DD) said Tuesday it is exploring "strategic alternatives" for its Performance Chemicals unit, as the industrial giant tries to focus on higher margin food and energy businesses.

While DuPont's possible sale of the under-performing chemicals business is likely to be viewed positively by shareholders, most notably the company's new investor Nelson Peltz of Trian Fund Management, it may put the over 200-year old company's future as a component of the Dow Jones Industrial Average at risk.

Already DuPont is one of the smallest Dow Industrials components, with a market cap just over $52 billion as of Monday's close. A spin-off or sale of the Performance Chemicals business, which generated about 20% of the company's overall revenue last year and a similar share of profits, could drop the company below the size of Hewlett Packard ( HPQ), the next smallest Dow member.

In that sense, DuPont's potential corporate restructuring could mirror a similar dismantling at Kraft ( KFT), another large Trian Fund Management investment. Peltz, often an activist shareholder, was one of the investors driving Kraft to break itself into Mondelez ( MDLZ) and Kraft Foods ( KFT). After Kraft's spin-off of Kraft Foods in 2012, the company was dropped from the Dow.

It is no surprise then that Peltz has become an investor in DuPont just as the company begins to consider ways to rationalize its chemicals, foods and energy businesses.

"DuPont's review of strategic alternatives for its Performance Chemical segment may include a full or partial separation of each of these businesses from the company through a spin-off, sale or other transaction," the company said in a Tuesday press release.

The unit includes DuPont's Titanium Technologies and Chemicals & Fluoroproducts businesses which generated revenue of $7.2 billion in 2012. DuPont said it could look at sales of each business individually.

In a telephone interview, DuPont spokesperson Michael Hanretta said it was too early to speculate beyond the company's announcement of its strategic review.

DuPont CEO Ellen Kullman wouldn't speak about how a sale or spin-off would impact the company's 45 cent quarterly dividend.

"It's, as we said, a strong business for the company. But it's cyclical, it's volatile, and it's low growth," Kullman said of DuPont's performance chemicals business on the Tuesday morning conference call with investors.

Even if DuPont does sell or spin its performance chemicals business in full, there is no guarantee the company's ultimate strategy will be to get smaller.

In 2012, the company sold its well-known car paint unit to private equity firm Carlyle Group ( CG) for $4.9 billion, in a deal that came at about the same time the company was integrating a $5.8 billion acquisition of Danish food and biofuel enzyme maker Danisco.

With $7 billion in cash on DuPont's balance sheet and further possible financial flexibility in a performance chemicals spin-off, the company could be laying the foundation for further transformation. A spin-off could allow DuPont to push harder into foods and energy businesses and encroach on markets dominated by Dow Chemicals ( DOW), Monsanto ( MON) and FMC Corp. ( FMC).

Spin-offs and a strategic re-positioning of DuPont towards higher margin businesses through M&A activity may also be the company's easiest path to rising stock market performance in coming years.

"Given the recent move in DuPont's share price, on top of its impressive year-to-date performance, it is not obvious to us that there is a clear path to meaningful incremental shareholder value creation absent further actions across the balance of the portfolio and/or material use of the balance sheet," Vincent Andrews, a Morgan Stanley analyst, wrote in a Monday client note.

" We have been carefully weighing the strong cash generation of our Performance Chemicals businesses against their cyclicality and lower growth profile, as well as where the power of DuPont's integrated science can be differentiated," DuPont CEO Kullman said in a press release.

DuPont also reshuffled its management ranks on Tuesday, expanding the role of James C. Collins and Matthew L. Trerotola.

In second quarter earnings released on Tuesday, DuPont said its operating earnings fell to $1.28 a share from $1.50 at this time last year. While the company's bottom line slightly beat Wall Street estimates, quarterly revenue fell to $9.84 billion, missing consensus.

Operating profits at DuPont's performance chemicals business dropped 56% as a result of the falling price of titanium dioxide, otherwise known as TiO2.

"DuPont is now the third company to publicly explore strategic alternatives for its Ti02 business, with the other two yet to make meaningful progress," noted Andrews, the Morgan Stanley analyst.

Peltz of Trian Fund Management, meanwhile, may be interested in corporate breakups as a way to drive new growth and acquisitions.

At a CNBC conference earlier in July, Peltz said he would push for Pepsico ( PEP) to acquire Mondelez, the legacy Kraft business, in what would be among the largest corporate mergers in recent years.

DuPont shares were less than 1% to $57.51 in Tuesday afternoon trading.

Trian Fund Management didn't immediately respond to a call seeking comment.

-- Written by Antoine Gara in New York

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