Peltz, the real face of DuPont?

Nelson Peltz may have lost last spring's proxy battle for DuPont, but it looks like he's winning the war.

Since his bid for four seats on DuPont's board was narrowly defeated in May, DuPont has been following Peltz's playbook. CEO Ellen Kullman, who adamantly opposed many of Peltz's ideas for a leaner, smaller DuPont and was widely hailed for staving off Peltz's frontal assault in the proxy vote, retired suddenly in October.

In her place is Ed Breen, who brings a reputation for trimming fat, earned during his time at the helm of Tyco International, when he oversaw the spin-off of multiple units.

In Breen's first week as CEO, cuts came at a furious pace. He laid off between 80 to 100 workers, halted an IT project and consolidated four units into two.

Breen is reviewing the company from top to bottom, vowing to eliminate $1.6 billion in expenses by the end of 2017.

All the while, Peltz has been increasing his interest in DuPont.

The activist investor has upped his stake in the company, acquiring another 1.2 million shares since the vote. Peltz, who heads New York hedge fund, Trian Fund Management, now owns 25.8 million shares, moving him up one spot to the company's fourth largest stockholder.

Through Trian, he remains outspoken about DuPont's performance. Immediately after Kullman's retirement in October, Trian Chief Investment Officer Ed Garden was on CNBC offering Trian's perspective.

Perhaps most telling, Peltz held a private meeting right after Kullman's departure with DuPont board members. Details of the conversation remain secret, but one media report described it as "tense."

DuPont is a very different company from the one Peltz sought to influence by winning board seats. Since he launched his proxy war in January 2015, Kullman shrunk DuPont through the sale of a theater it owned in downtown Wilmington and spun off its performance chemicals unit as an independent company known as Chemours.

Both Peltz and DuPont declined to comment for this story. But Peltz's recent actions point to him waging another fight for seats on the chemical giant's board.

Depending what happens with the company's agriculture unit, academics and Wall Street analysts say, could make a proxy battle irrelevant.

"The big elephant in the room is whether or not Breen splits off the agricultural unit," said John Roberts, an analyst with UBS Global Securities in New York.

Consolidation should happen

On an October call with analysts to discuss DuPont's third quarter earnings, Breen said he has already approached other companies about a possible deal, hinting he could either divest some or all of the unit or bolster it through an acquisition.

"I am personally in talks with CEOs of some of the other companies," he told analysts. "Consolidation should happen."

The agriculture unit is viewed as one of DuPont's strongest, but it struggled in the third quarter with an operating loss of $210 million. That is a $154 million increase over the operating loss the unit recorded in the third quarter of 2014. DuPont attributed the loss to decreased demand for pesticides, lower seed sales and a negative currency impact from the stronger U.S. dollar overseas and shutdown at DuPont's LaPorte, Texas, plant after four workers died in a November industrial accident.

"The view was that Ellen Kullman wouldn't look at all options for agriculture," Roberts said. "She would look at some options, but separating the unit was not on her radar. Breen said he is looking at all options, but whether or not he chooses to go down that path is speculative."

Jeffrey Sonnenfeld, a professor at Yale University, said the fates of Peltz and the agricultural unit could be closely tied, especially since he advocated separating the segment.

"If it looks like DuPont is beginning the process of a divestiture, that could diminish the value of any Peltz saber rattling," he said.

Others in academia agreed with Sonnenfeld.

"If Peltz really believes there is a certain unit that should be sold and DuPont doesn't sell it, he's going to get irate, especially since he has gone on record saying they should dispose of that unit," said James Shein, a professor at Northwestern University.

The rationale behind spinning off the agriculture unit is that selling off a business line stuck in a down cycle will boost the stock price because the unprofitable segment will no longer drag down stronger units. In addition, there will be less competition for overall corporate resources, allowing the company to focus on markets that will generate higher yields.

Sonnenfeld called such a view, "short-sighted."

"I think that is a tragic illustration of the short-termism of activist investors no matter what they say," he said. "Being focused on the short-term creates pressure to go into a fire sale and sell valuable assets at their lowest prices."

Low returns agricultural market

The agricultural market is generating some of the lowest returns for businesses in nearly a decade. Prices of crops such as corn and soybeans have dropped, while land and seed prices have increased. Total earnings for farmers are expected to drop by 36 percent in 2015 to $58.3 billion, according to the U.S. Agriculture Department.

U.S. farmers are not the only ones feeling the pinch. In Brazil – one of DuPont's most active markets – demand for seed and crop protection products dropped in the third quarter because of its weakening economy. With profits shrinking and credit difficult to obtain, Brazilian farmers are growing fewer crops.

Standard and Poor's cut Brazil's credit rating to "junk" last month. Brazil's economic uncertainty is among the reasons for DuPont's agricultural unit's struggles.

DuPont is not the only company suffering in the agriculture sector. MIke Mack, CEO of Switzerland-based seed supplier Syngenta, stepped down in October amid pressure to boost shareholder returns after spurning a takeover bid from Monsanto.

Monsanto pursued Syngenta in an effort to bolster its own shares. In the company's fiscal fourth quarter, ending Aug. 31, its revenues were down 10.5 percent, while revenues from its agricultural productivity unit declined 12 percent.

Dow Chemicals announced this fall plans to sell its AgroSciences business after decreased earnings, also impacted by lower crop prices in Latin America. The unit's third quarter sales were $1.2 billion, down from $1.4 billion in 2014.

"It has everything to do with supply and demand and what that does to prices when supply exceeds demand," said Matt Arnold, an analyst with Edward Jones in St. Louis. "The agricultural industry is truly cyclical in nature, but that cuts both ways."

DuPont not in a vacuum

As the agricultural market continues to decline, some wonder if Breen can even make a deal involving the unit. Everyone in that industry is looking for partners and there is the possibility that one company may end up being the odd man out.

"Dow Chemical's CEO said everyone is talking to everyone," said Roberts, of UBS. "DuPont does not do what it wants do in a vacuum. What DuPont does might be affected by what its competitors do."

As a result, Roberts said, companies could be mixing and matching various business lines depending on their needs.

"The combinations could be very different in light of the industry," he said. "Syngenta and DuPont would be different than Dow and DuPont."

As the agricultural companies compare notes on possible divestitures and mergers, Arnold said the industry is poised for a rebound in 2017, cautioning that some companies may want to wait out the downturn.

"DuPont possesses a unit where earnings are going to improve relatively soon if status quo prevails," he said. "Right now, when the market is in a trough, it's not a great time to be a seller."

Signals and symbols

Sonnenfeld said Breen is smart to examine the agricultural unit at this time, but warned against making a hasty transaction based on market conditions or Peltz rhetoric.

"I give Ed Breen a lot of credit for asking the right questions," he said. "But there is not a worse time to sell this stuff."

Even if market conditions tie Breen's hands, some think the effort the CEO is putting into repositioning the agricultural unit could be enough to appease Peltz.

"It would still have impact because it's about signals and symbols," Sonnenfeld said of the possibility of a deal falling through.

Arnold agreed and said there is too much uncertainty surrounding Breen's direction for DuPont.

"It would seem pretty hasty to launch a contest when there is still a lot to be determined," he said. "It seems like there would need to be a little bit of patience to let things play out rather than intervene without complete information."

Contact Jeff Mordock at (302) 324-2786, on Twitter @JeffMordockTNJ or jmordock@delawareonline.com.