Based on history, Peltz could change DuPont

Jeff Mordock
The News Journal
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DuPont is set to move its headquarters from the DuPont building downtown to a Chestnut Run (above) location.

If billionaire Nelson Peltz succeeds in electing four candidates to DuPont's board, the company could look vastly different based on his track record with previous businesses. The new DuPont will likely be leaner and generate better shareholder returns, but cost jobs in the process.

Peltz, through his investment firm, Trian Fund Management, is one of DuPont's largest stockholders. The hedge fund owns a 2.68 percent stake in DuPont estimated to be worth roughly $1.8 billion. This month, he initiated a proxy contest with DuPont by nominating four directors for the company's 13-member board.

Under Peltz's plan, DuPont would be split into three autonomous businesses. The main company will likely still focus on its core business, industrial biosciences, but Peltz detailed in a September white paper a plant to spin off another unit.

Although Peltz did not identify the unit he would spin off, it is widely believed to be DuPont's health and nutrition business. The split, combined with DuPont's previously announced plan to spin off its performance chemical business, Chemours Inc., would create a smaller DuPont than the company's roughly $66 billion market capitalization.

Peltz would further reduce DuPont's holdings by selling the DuPont Hotel and its country club. He had called for divesting the 130-year-old DuPont Theater, but the company said last week it would sell the Broadway-style playhouse to the Grand Opera House. Financial terms were not disclosed. Peltz estimated the combined hospitality holdings cost DuPont between $2 billion to $4 billion of excess corporate costs.

Executives from Trian declined to be interviewed about their plans for DuPont.

The strategy Peltz is employing with DuPont mirrors the gameplan he enacted with other companies such as Wendy's, H.J. Heinz Co. and Cadbury. The activist investor announces in filings with the Securities & Exchange Commission that he has acquired a small stake in a company. Then he pressures the company to reduce costs and spin off any noncore businesses. Then he initiates a proxy war to implement his corporate vision.

"What Peltz likes to do is find companies where it is easy to convince investors there is an undervaluation due to some structural issue," said Steven Isberg, an associate professor of finance at the University of Baltimore. "In this case, DuPont is a widely diversified company with seven business units. Peltz is telling investors that it doesn't make sense for a company to have multiple lines of business because that diversification is something investors can do on their own by buying separate stocks."

It is a strategy that has rewarded both Peltz and his fellow shareholders.

Improved Shareholder Returns

By April 2006, Trian had assumed a 5.4 percent stake in ketchup maker Heinz. Then, in a white paper, Peltz unveiled a turnaround plan that called for the company to reduce costs and sell assets he viewed as unnecessary.

He demanded the company sell Plasmon, an Italian baby food subsidiary, and its international operations in Asia Pacific and Indonesia. Peltz also pushed to improve efficiency on the manufacturing level by partnering with other companies or outsourcing.

If Heinz enacted his vision, Peltz alleged at the time, the company would reduce its annual costs by $575 million.

After feeling the heat from investors, Heinz Chief Executive Officer William Johnson implemented many of Peltz's cost-saving ideas. Johnson sold or closed 15 factories and reduced spending by roughly $535 million.

Peltz only succeeded in getting two of his nominees on the board, including himself, but the pressure he put on Johnson to cut costs increased shareholder value.

Nelson Peltz has not called for layoffs at DuPont, so it’s hard to know if they will occur or how many of those jobs will be in Delaware.

Heinz was sold in April 2013 to Berkshire Hathaway Inc. and 3G Capital in a $28 billion transaction, or $72.28 per share. The April 2013 sale generated a 20 percent premium for Heinz shareholders. Interestingly, Peltz did not reap all the benefits of his plan. He had sold off most of his stake in the company a year earlier, when the company's stock reached roughly $55 per share.

"In the Heinz case, he came up with a white paper for everything from reducing company costs to changing the ketchup dispensaries in restaurants," said Duke University Professor Alon Brav, who has written papers on activist investors like Peltz. "That gave him a lot of credibility with investors who backed his plan."

Prior to targeting Heinz, Peltz launched a similar campaign for Wendy's in 2005. Much like Heinz and DuPont, the investor announced his acquisition of Wendy's stock and lobbied for the company to reduce costs and spin off periphery business lines. At the time, Wendy's then-chief executive officer accused Peltz of delivering "an ultimatum" to the company.

But the fast food giant listened. In late 2005, Wendy's acted on his urging to spin off its doughnut subsidiary Tim Hortons. The move generated a $960 million payment for Wendy's, which had acquired Tim Hortons in 1995 for $425 million. Wendy's also received 82 percent of Tim Horton's stock in the deal.

Wendy's also sold its underperforming Baja Fresh restaurant subsidiary. The Mexican fast-food chain was purchased by Wendy's in 2002 for $275 million and sold for $31 million to a private consortium last year.

In 2008, Peltz, through Triarc Companies Inc., acquired the remainder of Wendy's, paying $2.34 billion in an all-stock transaction. He merged the company with Arbys Restaurants, which he already owned. Roughly three years later, Peltz flipped Arbys, selling to Roark Capital Group in a transaction that valued the restaurant chain at $430 million.

About a year before the Arby's sale, Peltz announced he had amassed a 2.98 percent stake in candy and beverage giant Cadbury Schweppes. He soon began pressuring the company to split from its less valuable beverage business. Cadbury eventually spun off the beverage business as a publicly traded company, currently operating as the Dr. Pepper Snapple Group. Cadbury stock jumped 15 percent as speculation about the move increased and 3 percent immediately after the transaction was announced.

The leaner Cadbury was acquired by Kraft Foods for $19.8 billion in 2010, a move that represented a nearly 50 percent premium over the company's stock price.

"Peltz launches his strategy and starts to put pressure on a company," Isberg said. "As that happens, other investors begin to buy in. As those investors buy in, the company already begins to produce value."

Brav who has studied 2,000 activist investor transactions between 1994 and 2007, said that in almost every situation a company's stock increased and improved shareholder returns.

"There is no evidence that activist investors are harmful to a company," he said. "An activist is good for shareholders and there doesn't seem to be too much evidence that they ever misjudge the market."



Stockholders may be the big winners after an activist transaction, but their cost-cutting methods almost always result in jobs losses. When Heinz's Johnson eliminated the 15 manufacturing plants in 2006, he also eliminated 2,700 jobs, roughly 8 percent of its workforce.

Once Peltz began pressuring Wendy's, the company consolidated three of its marketing units into one and slashed 375 corporate and divisional costs in a series of moves that saved $100 million.

Almost immediately after Triarc acquired Wendy's, then-incoming Chief Executive Officer Roland Smith send a letter to company employees announcing layoffs would be part of the company's restructuring.

Last year, Peltz began publicly urging PepsiCo to separate its snacks and beverage businesses. The soda manufacturer responded in February by announcing that after an "exhaustive review" it will retain both businesses, but improve productivity by $1 billion with 40 percent of the savings coming in labor, meaning job cuts.

After an activist investor event, labor productivity increases, but wages remain static or decrease as a result of job losses and remaining employees shouldering an increased work load, Brav said. He noted that the increased productivity benefits the company, but the employee receives little benefit from being pushed harder. In fact, according to a 2013 study authored by Brav and others, employees of such companies experience a wage decrease of 6.1 percent.

"Productivity often goes up, but employees don't enjoy the benefits," he continued. "They don't share in the fact that the company will do better. Shareholders will do better because efficiency will go up. We see more done per hour, but we just don't see an improvement in wages going up."

Peltz has not announced plans for layoffs at DuPont, but Isberg cautioned that he needs to be careful if he decides to shed jobs. For example, cuts to DuPont's research and development department could be disastrous.

"If Peltz decides to cut research and development, that is different than cutting hourly minimum wage jobs," Isberg added. "That would have a bigger impact because you are cutting people with a larger income base. That could really hurt Delaware."

Peltz has not called for any layoffs at DuPont, so it's hard to know if they will occur or how many of those jobs will be based in Delaware.

"It's hard to predict what is going to happen with DuPont because Peltz hasn't come out and said that he'll cut this thing or that thing," Isberg said. "He is talking in broad terms about cutting expenses to avoid the public relations hit it takes when they start announcing these cuts."


Activist investors are often stereotyped as short-term company owners looking to generate a quick return at the expense of a company's long-term health. However, Brav said, on average, returns generated by these events last beyond the activist investor's exit from the company.

He said that investors who hold a stock for as long as five years after an activist investor joins a company's board often see a fair rate of return.

"The typical activist investor stays for about two years and leaves, but the price doesn't jump back down," Brav continued. "There is plausible evidence that if Peltz gets his away the increased stock price will be sustainable."

Isberg countered that sustainability often depends on a company's moves before the activist investor earns a seat on the board. He said, in some cases, companies spin off a division or restructure to get the investor to back off.

"Sometimes, they don't look at things intelligently and then they are stuck with those decisions," Isberg added. "You can't see the outcome of the decision materialize until later on."


If Peltz succeeds with his plan to reshape DuPont, the hotel and country club will certainly be on the sales block. The company has already entered into an agreement to sell the theater in response to pressure from Peltz.

In a September white paper, he questioned the "strategic fit" of the three businesses. Although the hospitality assets benefit Wilmington, analysts say they can see Peltz's point, noting that the properties are outside of DuPont's core business.

"Peltz raised a legitimate question," Brav said. "Do DuPont's equity holders need to support a theater in downtown Wilmington?"

Isberg agreed, saying that activist investors cut businesses to the core to create a "pure play investment," where a company is split down to its most basic unit.

"Activist investors immediately cut anything on the fringe," he said. "Does a country club really have anything to do with the core business? An asset like that could make Peltz's point that DuPont is over diversified and management doesn't understand what drives the company."

H. Rodney Sharp III, served as DuPont director between 1981 and 2005. He said the company actually sold the hotel to the Biltmore chain sometime in the late 1920s or early 1930s, but bought it back after they became dissatisfied with the way it was operated.

"It's absolutely part of DuPont's social responsibility to the city," Sharp said. "The hotel was built so that there would be a good place for visiting customers. It is still a landmark in the city."

Can DuPont Stop Peltz

DuPont has not formally opposed Peltz's proposed slate of directors. The company did issue a statement saying the activist investor's plan had the "potential to disrupt" its long-term strategic efforts.

Analysts say the best way to keep Peltz from splitting DuPont is to make its case to investors that the company is well run and investors will enjoy greater returns if they agree to support management's vision for the future.

"You really need to get enough institutional investors to side with you," Isberg said. "The company has to do something to get those investors on their side."

DuPont may need to make a strong case, however. One of the nation's largest institutional investors, the California State Teachers' Retirement System publicly announced in September that it will support Peltz's nominees for DuPont's board. The pension fund owns a 0.2 stake in the company.

Peltz claimed in an SEC filing that DuPont has not produced returns comparable to rival chemical companies, including BASF SE, Honeywell International, 3M Co., and Dow Chemical Co. DuPont recorded a total shareholder return of 94 percent since 2008, while its rivals averaged a 110 percent total shareholder return during the same period, according to the filing.

DuPont has countered in a statement that it has outperformed the S&P 500 and its peers across the last 1-, 3- and 5-year periods under current management tenure.

In many cases, companies often settle with activist investors agreeing to support one or two of their board nominees in order to broker peace. Brav said that might be viable solution because he doesn't expect Peltz to give up on DuPont.

"He's not going away," Brav continued. "If you give him two people on the board, he may be happy and he won't have the majority. Allowing him to have a board presence will allow DuPont and Peltz to amicably share where they think the company ought to go."

Contact Jeff Mordock at or (302) 324-2786.

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