The two deals haunting Nelson Peltz’s fight for DuPont
Nelson Peltz, the 1980s corporate raider-turned-activist investor, has had plenty of success on Wall Street. But two of his biggest stumbles have been in the chemicals industry. That might turn out to be a problem as he fights to get on the board of chemical giant DuPont (DD).
In a letter to shareholders sent last month, DuPont CEO Ellen Kullman referred to Peltz’s experience with chemical company Chemtura as one of the reasons she thought shareholders should not vote for Peltz or the three others nominated by his hedge fund Trian Fund Management to join the company’s board. Trian launched a proxy fight against DuPont in January.
According to Kullman’s letter, Chemtura is the only other investment Trian has made in the chemicals industry, and it was a bust. Edward Garden, a Trian partner, joined Chemtura’s board in early 2007, shortly after Trian took a sizable stake in the company. A little more than two years later, in March 2009, Garden quit Chemtura’s board. A week after that, the company filed for bankruptcy.
But while Chemtura may be Trian’s only other investment in the chemical industry to date, it was not Peltz’s first fumble in the sector. In 1986, an earlier company run by Peltz, Avery, bought Uniroyal Chemical Corp. That deal, like Chemtura, fizzled as well.
At the time of the acquisition, Peltz said that he planned to build Uniroyal into a multi-national player in the specialty chemical business. But less than a year-and-a-half later, Uniroyal was up for sale. Peltz, in a press release issued at the time, said the acquisition hadn’t worked out as planned. It took another year-and-a-half for Peltz to unload the company, for a small profit. The Predators’ Ball, the bestselling book about Peltz and other corporate raiders, singled out Uniroyal as one of the deals from the 1980s buyout boom that had a “less than happy ending.”
Smooth investing sailing, except for chemicals
Outside the chemical industry, Peltz has had an enviable track record. His investment philosophy is driven by the idea that simpler, more focused companies perform better than their more complicated peers. And, once on the boards of companies, he often pushes to pare down divisions and cut costs. Peltz declined to offer public comment for this story.
Peltz appears to have done well. How well is hard to tell. Trian doesn’t publicly disclose its investment returns. Since the mid-2000s through the end of 2014, shares of the companies in which Trian has invested in and held a seat on the board, have increased at an average of 62%. The S&P 500 has risen an average of 51% during the same holding periods. (A person close to Peltz says Trian’s investment returns are even better if you measure them from when Trian first bought shares, not when the hedge fund got a seat on a company’s board.)
And he has had some big wins. Shares of Dr. Pepper Snapple Group nearly tripled in the four years Trian held them and had a representative on the beverage company’s board. Heinz’s stock rose 122% while Trian had a presence on the company’s board, about triple what the market returned during the same period.
But not all of Trian’s investments have been winners. Shares of Mondelez, the snack company, are down slightly from where they were when Peltz was named to the board in late January 2014. During the same period, the market has been up by nearly 13%. In five of Trian’s last 11 activist campaigns, shares of the companies have underperformed the market after a representative of the fund joined the board.
Chemtura was Peltz’s biggest bust. A source close to Trian says it’s the only investment that the hedge fund has made that ended in bankruptcy. It was a risky pick from the beginning. When Garden joined Chemtura’s board in early 2007, the company had only been profitable for a single year within the previous five years, making $19 million in 2003. During the other four years, it lost a total of $710 million. It also had a huge amount of debt. Nevertheless, Garden and Peltz saw the potential for a turnaround, and they went in to work their magic. But a Chemtura revival turned out to be harder to pull off than either of them expected.
Shortly after Garden joined the board, Chemtura began to follow the typical Trian playbook. It began to sell off smaller divisions and cut costs. In press releases, the company said it was selling off parts of the firm so it could concentrate on its core business. Garden says he was a major force behind getting the company to simplify its operations.
But two Chemtura insiders who were at the company at the time say the plan to spin-off divisions was in place before Garden joined the firm’s board. They said they don’t remember Garden pushing for any major strategy changes at the company during his time on the board, though neither were directly privy to all of the board meetings.
Either way, Trian’s Chemtura investment didn’t end well. In late 2007, the company’s bottom line started showing some improvement, turning a quarterly profit from continuing operations for the first time in years. And a private equity firm seemed interested in buying the company. But in 2008, that deal fell apart. Soon after, Chemtura’s more than $1 billion in debt caught up with the company. In early 2009, the company discovered that it was unable to roll over $300 million in debt and filed for bankruptcy, eventually wiping out 80% of Trian’s investment.
Yet another ‘frustrating’ chemical experiment
Uniroyal, on the other hand, was a “profitable, healthy” company when Peltz took it over in 1986, according to The Predators’ Ball. At Uniroyal, Peltz was not just a passive investor or a single board member. He oversaw the operations of the company. That didn’t stop things from unraveling. According to the book, Uniroyal quickly became the victim of a botched takeover and poor corporate strategy by Peltz.
Sales at Uniroyal rose during the three years it was controlled by Peltz, up 43%. But so did expenses, up 39%. The biggest problem, though, was debt. Avery, Peltz’s company, borrowed $1 billion to do the Uniroyal deal and for subsequent transactions. The interest payments quickly outpaced what Uniroyal was able to earn from its operations, and the company was forced to take large write downs because of the acquisition. In all, Uniroyal lost nearly $20 million in the first 11 months after the 1986 acquisition, down from a profit of $28 million the year before, and just over $50 million the year before that, according to a 1989 Uniroyal proxy statement. In 1988, the losses grew to $44 million.
In January 1988, about 15 months after Peltz had bought Uniroyal, he put the company back up for sale. Peltz said the reason had to do with the sharp run-up in the stock prices of chemical companies. Peltz had planned to build Uniroyal through acquisitions, but acquisitions, Peltz said, were no longer at acceptable prices, and the company was constantly being outbid by foreign rivals. He called the experience “frustrating.”
But, apparently, that sharp run-up in value of chemical companies didn’t include Peltz’s Uniroyal. It took the investor 14 months to lock down a buyer for the company. And even after that, Avery was only able to book a $30 million profit on the deal, after expenses, according to a 1989 Uniroyal proxy filing, or about 5% more than the $710 million Peltz had paid for the company three years earlier.
A few months after the deal was announced, Uniroyal was forced to pull a chemical from the market that was used to coat apples to keep their red color. The EPA said Uniroyal’s chemical posed a significant cancer risk to humans. A source close to Trian says the chemical accounted for less than 1% of the company’s sales. Uniroyal’s next owners found a lot more success with the company than Trian. Seven years later, when Uniroyal was sold again, the value of the company had grown by $600 million.
As for Chemtura, a source close to Trian says that is now seen in the firm as just a case of bad luck. Chemtura was one of a number of highly indebted industrial companies that struggled in the financial crisis. LyondellBasell, another chemical company, also was forced to file for bankruptcy.
When industry experience doesn’t count for much
On Friday, DuPont officially rejected Peltz’s latest offer to put the investor himself and one other Trian representative on DuPont’s board, down from his initial proposal of four nominees. Peltz also wanted two seats on the board of Chemours, a company that is being spun out of DuPont. Peltz’s Trian now owns a 2.7% stake of DuPont. He has been pushing for the company to be split into three parts.
DuPont offered its own truce with Peltz a few weeks ago, which included allowing Trian to nominate one of the company’s board members, as long as that nominee was not Peltz. Peltz has said that he won’t accept a deal that doesn’t put him on DuPont’s board. On CNBC last week, Peltz was asked why he insists that he be the one to join DuPont’s board. Peltz’s response: He has industry experience. He used to run an ag chemical company.
A source close to Peltz confirmed to Fortune that the experience he was referring to was his three years with Uniroyal. If that experience is any guide, DuPont shareholders might want to keep Peltz as far away from their company’s board as possible.