By David Benoit and Jacob Bunge
Nelson Peltz's investment firm launched a fight against DuPont
Co. to add four directors to the company's board, setting up one of
the biggest battles ever initiated by an activist investor.
The showdown follows 18 months of bickering between the two
sides, and pits the competing ideas of Trian Fund Management LP,
one of the world's biggest activist-investment funds, against those
of a 212-year-old stalwart of U.S. industry.
With a market capitalization of $67.5 billion, DuPont ranks
among the largest-ever targets of a proxy fight by an activist
investor. The board nominations mark the first such fight in almost
a decade for Trian, which prefers to work with companies out of the
public eye. Trian owns around 2.7% of DuPont's shares.
Late Thursday DuPont said its board would review Trian's
nominees and "make a recommendation that is in the best interest of
all shareholders." The company strongly defended its performance
and governance under Chairman and Chief Executive Ellen Kullman and
said that, "Despite numerous efforts to engage
constructively...Trian has chosen this path with the potential to
disrupt our Company at a key stage of execution against our
plan."
Trian's four nominees, which include Mr. Peltz himself, will be
put to a shareholder vote at the Delaware-based chemicals company,
likely in April, unless the parties reach a settlement.
Trian has argued that DuPont's conglomerate structure is
unwieldy and a burden on results. The activist wants to splinter
DuPont's seven business lines into three companies: one aimed at
agriculture and nutrition, another for industrial materials and a
third for performance chemicals, which produces materials that go
into things like nonstick frying pans and house paint. A breakup,
Trian argues, will free those individual businesses to cut costs
and better compete.
"This is, as we see it, a referendum on performance," Mr. Peltz
said in an interview.
DuPont, which has a 13-person board, already plans to spin off
the performance-chemicals unit, but it has said it disagrees with
Trian's analysis and believes its diverse set of businesses benefit
from integrated research and sales efforts.
The challenge for both sides now is to win over shareholders.
Typically, the biggest investors reserve judgment until late in the
campaign, often after third-party proxy advisers weigh in. Those
advisers have recently supported many activists seeking minority
board representation, on the theory that shareholder voices in the
boardroom are unlikely to hurt.
Robert Gentry, principal at San Francisco-based investment
adviser Stewart & Patten Co., said his firm has held DuPont
shares for decades and generally backs management. However, he
said, "dissenting viewpoints on the board could actually be a
healthy thing."
Trian has already lined up support from one DuPont shareholder,
the California State Teachers' Retirement System, or Calstrs. Stock
analysts have been mixed, with some saying DuPont's performance
doesn't justify a shareholder uprising.
DuPont stock had a 266% total return, including dividends, from
2009 through 2014, versus 159% for the S&P 500. Last year,
DuPont had a 17% return, again beating the broader market, though
much of that gain occurred after Trian in September went public
with its argument for the company's future, a move that pushed up
DuPont's stock price.
The proxy fight bucks a recent trend for activist investors.
Activist firms and their targets typically prefer to avoid proxy
fights, which can get expensive, time consuming, and bitterly
personal.
Trian has been among the most successful activists at securing
board seats without going so far as a shareholder vote. Last year,
Mr. Peltz joined the board of snack maker Mondelez International
Inc., and his partner Ed Garden joined the board of Bank of New
York Mellon Corp., both without a proxy fight.
In Trian's last proxy fight, in 2006, it secured board seats at
ketchup maker H.J. Heinz Co. After that battle, Mr. Peltz grew
close with management at Heinz, which has since been sold to 3G
Capital Partners LP and Warren Buffett's Berkshire Hathaway
Inc.
Arthur Winkleblack, Heinz's former chief financial officer, is
one of Trian's nominees to the DuPont board along with John Myers,
the former chief executive officer of GE Asset Management, part of
General Electric Co., and Robert Zatta, acting chief executive and
chief financial officer of chemical company Rockwood Holdings
Inc.
In defense of its structure, DuPont has pointed to
market-beating stock returns since Ms. Kullman took over at the
start of 2009 and says its board is loaded with experienced
directors who are revamping the company to focus on more-profitable
products. It has also noted ongoing cost cuts and share
buybacks.
Trian first reached out to DuPont in June 2013. Early on,
tensions ran high, according to people familiar with DuPont and
Trian and letters between the two sides reviewed by The Wall Street
Journal.
Trian felt that DuPont and its advisers, Goldman Sachs Group
Inc. and Evercore Partners Inc., weren't seriously considering
Trian's arguments. At a September 2013 meeting with DuPont
representatives, Trian fielded questions about its numbers on
DuPont's expenses and business lines, said people familiar with the
meeting.
The meeting "exacerbated our frustration over the lack of
interaction with management and/or their advisors as it was clear
that despite nearly three months having passed, the analysis of
Trian's work product was cursory," Trian's Mr. Garden later wrote
to DuPont's lead independent director, Alexander Cutler.
DuPont and its advisers felt they evaluated Trian's proposals in
detail, say people familiar with their thinking, further explaining
that participants at the meeting had to be tight-lipped as DuPont
was reviewing its plans for the performance-chemicals unit, but
couldn't share any details at the time. A month later it announced
the unit would be spun off.
Then Trian got what it felt was another slap in the face. A
field trip organized by Deutsche Bank AG analysts to DuPont's
Pioneer seed division, slated for November, was canceled. Trian
believed DuPont tried to block the firm from attending. Other
people familiar with the field trip said there wasn't enough
interest from other shareholders.
In October 2013, Mr. Garden raised the prospect of board seats
in a phone call with Ms. Kullman, saying if the sides couldn't
reach an agreement, it should give Trian two seats.
DuPont perceived his call as an ultimatum, according to a letter
from Mr. Cutler to Trian: break up, let Trian onto the board, or
face a public campaign. DuPont rejected the proposal.
Meanwhile, the company announced the spinoff of performance
chemicals, a unit that accounts for about 18% of revenue. Trian
felt it wasn't enough, but because DuPont pledged to hit targets
for growth in 2014, the investor agreed to hold fire.
Six months later, DuPont announced it would miss the
guidance.
Mr. Garden again requested board representation. Mr. Cutler came
back with another "No."
In September 2014, Trian released its analysis to the public and
began courting other shareholder support. Talks continued, but each
side remained resolute on the question of Trian joining the
board.
Write to David Benoit at david.benoit@wsj.com and Jacob Bunge at
jacob.bunge@wsj.com
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