DuPont bets on food, fuel with Danisco deal

The deal, which would be DuPont's biggest acquisition since 1999, is another step in its transformation from an industrial chemical maker to one that has diversified businesses ranging from bulletproof vests to solar panel films.

DuPont and Danisco have a joint venture in cellulosic ethanol, a technology that involves turning agricultural waste, such as wood chips and switchgrass, into fuel. Some investors are nervous about this fledgling technology, which is propped up by a $1.01 per gallon U.S. tax credit and a mandate for gasoline producers to blend in a certain amount of ethanol.

The tax credit is slated to expire at the end of 2012, and it remains unclear if Congress will renew it and the mandate.

The deal is a bet that industrial biotechnology will pay off, Soleil Securities analyst Mark Gulley said. If that happens ... this is going to end up being a really attractive acquisition.

Changing business patterns isn't new for 208-year-old DuPont. The company produced much of the gunpowder used in World War One, invented nylon and Teflon, and held a controlling stake in paint customer General Motors during the 1920s and 1930s.

Currently it is more expensive to turn cellulosic ethanol -- instead of crude oil -- into fuel. Increased research, including at DuPont, are expected to drive the cost down over time.

In addition to biofuels, Danisco's food ingredients business, such as yogurt cultures, gums and natural sweeteners, attracted DuPont Chief Executive Ellen Kullman.

DuPont has been increasing its investments in the food business, which offers more stable earnings during economic downturns though growth tends to be relatively limited.

Food-related revenue accounted for about 32 percent of DuPont's 2009 revenue, with most of that coming from its Pioneer seed unit that it bought in 1999 for $7.7 billion, its largest acquisition to date.

After the Danisco deal closes, expected in the second quarter, almost half of DuPont's revenue will come from food products, analysts said.

ADD TO 2012 EARNINGS

DuPont said it expects the deal to add to earnings in 2012, but forecast a 30 cents to 45 cents per share hit this year. DuPont had previously forecast 2011 earnings of $3.30 to $3.60 per share.

This is a very attractive transaction from a financial point of view, Kullman said on a call with investors.

DuPont offered 665 crowns ($115) per share for Danisco, a 25 percent premium to Friday's close. Danisco Chairman Jorgen Tandrup said the company had received other bids, but did not expect a rival to trump DuPont.

Tandrup declined to name the other bidders, though admitted that until late Sunday night in Denmark, it was unclear who would clinch the deal.

There was a lot of tension, Tandrup told Reuters Insider. If you had asked me at 10 o'clock yesterday night who was going to be the winner, I couldn't have told you.

Danisco shares initially rose as high as 670.50 crowns early on Monday, above DuPont's cash bid, but then fell back to close at 657 crowns, up 24 percent. Shares in Danish rivals such as Novozymes A/S and Chr Hansen Holding A/S also jumped, along with Britain's Tate & Lyle Plc and DSM NV of the Netherlands.

DuPont's investment could help establish the growing biofuel enzyme sector, Novozymes said.

DuPont said its bid values Danisco at 12.8 times Danisco's earnings before interest, taxes, depreciation and amortization. Analysts put the valuation at around 11 times EBITDA, about where the highly rated consumer goods company Reckitt Benckiser currently trades.

To us, the bid seems reasonable, said Pieter Busscher, a portfolio manager at SAM Smart Materials Fun, the 13th-largest investor in Danisco. Novozymes is already well positioned on first-generation ethanol, and I have a feeling that DuPont does not want to be left behind.

DuPont shares fell 1.5 percent to $49.03 in afternoon trading. Shares of acquiring companies tend to drop just after large deals are announced.

DuPont is paying $5.8 billion cash and assuming $500 million of Danisco debt. DuPont will use $3 billion in existing cash to pay for the deal, and raise the rest in debt.

Danisco's sales growth over the last five years is very comparable to the sales growth at DuPont, Alembic Global Advisors analyst Hassan Ahmed said. If you look forward the next five years, you see a very similar profile.

Deutsche Bank is advising Danisco on the deal. JPMorgan Chase is advising DuPont.

(Additional reporting by Ole Mikkelsen in Copenhagen, Megan Davies in New York, and Quentin Webb, Cecilia Valente and David Jones in London; Editing by Sophie Walker, John Wallace, Phil Berlowitz)