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LBO Shops Lick Chops for DuPont Car Paint Deal

(Reuters) – Several buyout firms are preparing to participate in the roughly $4 billion auction for the unit of chemical maker DuPont that makes automotive finishes and industrial coatings, people familiar with the matter said.

DuPont is reviewing the sale of its performance coatings business, sources said previously, as the company reconsiders its focus after having grown from a maker of explosive black powder into a global materials company active in the chemical, food and agricultural sectors.

Major private equity firms have expressed early interest in the deal, according to the people familiar with the matter. KKR & Co, Bain Capital, TPG Capital and Onex Corp are among those who have made preliminary inquiries about the sale and talked to banks about financing a potential deal, these people said.

Wilmington, Delaware-based DuPont, advised by Credit Suisse Group AG, plans to launch the process in January by sending out financial information of the unit to interested parties, the sources said. Initial bids for the business, which has an estimated enterprise value of around $4 billion, are expected in February, they added.

The potential sale of the unit, which mainly sells to Maaco and other auto paint refinishers, comes as DuPont looks to focus on other growth areas such as food and nutrition. Ford Motor Co and General Motors Co are also key customers.

The world’s largest global producer of titanium dioxide, a white pigment that is used to make paint and other consumer goods, cut its full-year profit outlook on Friday as several of its markets weakened.

Piper Jaffray & Co analyst Mike Ritzenthaler said he expected the profit warning would have little impact on the performance coatings sale as the unit’s end markets remained as expected and that other issues such as efficiencies would be the main drivers in the sale.

“The unit has more overheads per unit margin than other competitors,” Ritzenthaler said.

He projects earnings before interest, tax, depreciation and amortization (EBITDA) for the business at over $400 million for 2011, growing to $460 million in 2012.

An offer of 8 times EBITDA would value DuPont’s performance coating business close to $4 billion — at a discount to U.S. peer Sherwin-Williams, which trades at 9.6 times 12-month forward EBITDA, according to Thomson Reuters Starmine.

Pre-tax operating income in DuPont’s performance coatings grew 12.5 percent year-on-year to $72 million in the third quarter, accounting for 8.5 percent of the company’s total pre-tax operating income, but 12 percent of total sales.

The coatings business is very sensitive to economic trends. Its sales slumped in 2008 and 2009 as carmakers scaled back operations and the strong recovery it saw in 2010 is now in doubt due to market uncertainty.

“There is tremendous amount of overhead at corporate level. This has been an unloved business for DuPont and there is a lot you can do with it,” said a private equity source who asked not to be identified.

DuPont has followed a strategy of “delivering earnings and cash growth through cost and working capital productivity while making only very selective growth investments” in performance coatings, the company said in its presentations.

While private equity firms have shown strong early interest in the business, it remains yet to be seen if potential trade buyers such as PPG Industries Inc and AkzoNobel NZ will also participate in the auction.

DuPont, KKR, Bain and Onex declined to comment. Representatives for TPG did not immediately respond to a request for comment.

(Reporting by Greg Roumeliotis and Soyoung Kim; editing by Andre Grenon)