DUPONT PACT WITH UNIFI: POLYESTER EXIT STRATEGY?

Byline: Scott Malone

NEW YORK — DuPont, a pillar of the polyester fiber industry for the last half century, is now talking seriously about someday exiting the business.
As reported, in April the Wilmington, Del.-based chemicals giant entered into a “manufacturing alliance” with Unifi Inc. whereby the two companies would jointly manage their separately owned polyester filament-producing facilities.
On Wednesday, DuPont revealed that, as a part of that agreement, over the next five years Unifi has the option of buying DuPont’s polyester filament operations, if both parties consent to the sale. Furthermore, after that five-year period, or sooner if the alliance is terminated, either party can call for the sale to occur and the other party must consent.
While the absolute price tag has not yet been set, the two companies have already agreed to a range of $300 million to $600 million for DuPont’s two filament plants in Kinston and Wilmington, N.C., Harry Parker, vice president and general manager of DuPont’s Dacron polyester business said in a conference call with reporters.
The deal could leave its wholly owned polyester fiber operations a tenth the size they once were.
In a joint statement, the two companies explained that should they terminate the alliance or at any time after June 1, 2005, “Unifi has the option to purchase from DuPont and DuPont has the option to sell to Unifi DuPont’s U.S. polyester filament business. If Unifi exercises its option, DuPont is obligated to sell the business to Unifi and, if DuPont exercises its option, Unifi is obligated to buy the business from DuPont.”
Parker explained that these provisions were made necessary by the amount of intellectual property that the two companies will have to share to jointly operate DuPont’s two filament plants and Unifi’s Yadkinville, N.C., filament plant.
“The option was included because there is quite a bit of technology that is going to have to be transferred as we optimize the assets. The technology is married to the assets, and there is no way to separate it back out,” he said. “There has to be some kind of agreement. If it doesn’t work out, everyone can’t just take back what they put in and go back to business as usual.”
Parker explained that the deal also allows for the possibility of the two companies continuing the alliance beyond five years, or for the possibility of DuPont buying Unifi’s Yadkinville plant should it wish. That, however, is unlikely, he said.
Asked about the likelihood that Unifi would buy DuPont’s polyester filament operations, Willis C. Moore, senior vice president and chief financial officer, said, “The alliance is established as a long-term venture and, like any deal you go into, you always want to have some exit strategy. The likelihood of us exercising that option or DuPont choosing to sell depends on a number of factors.”
He declined to elaborate.
DuPont’s polyester operations have been in a funk for the past few years. For fiscal 1998 and 1999, the total enterprise, which includes films and intermediates, as well as fiber, reported operating losses, partly as a result of the Asian financial crisis.
In 1999, the business reported an aftertax operating loss of $119 million on sales of $2.6 billion. However, in the first quarter of 2000 the operation swung back into the black, posting aftertax operating income of $9 million on sales of $589 million.
The poor results of DuPont’s textile operations stand in counterpoint to the company’s more vibrant life-sciences operations. For more than a year now, DuPont has been searching for ways to limit its exposure to the textile business’s volatility and to reduce its spending on polyester and nylon.
The main strategy for stepping back from polyester has been forming joint ventures. Last year, the company lined up a series of joint ventures around the world for its polyester operations, seeking to contribute its plants and assets to the party and find partners to pony up capital to reinvigorate the businesses.
While several of those joint ventures — including the DuPont-Akra polyester staple operation — are now up and running, it was the crumbling of a three-way deal for polyester filament between DuPont, Mexico’s Alpek SA de CV and Japan’s Teijin Ltd. that led to the alliance with Charlotte, N.C.-based Unifi.
At this point, only about 10 percent of DuPont’s polyester fiber operations — which, according to Parker, represent less than a third of the entire polyester enterprise — have not been put into an alliance or joint venture. Those are the company’s specialty polyester brands, including CoolMax.
The polyester enterprise is not the only DuPont fiber division to have felt pressure over the past few years. From 1997 to 1999, aftertax operating income at the nylon business fell from $372 million to $63 million, as sales slipped from $4.6 billion to $4.5 billion. Last year, the company announced that it would be reducing its planned spending on the nylon business in the years ahead.
The specialty-fibers business, however, has fared better. Its earnings rose from $708 million to $732 million from 1997 to 1999, as sales have risen from $3.3 billion to $3.4 billion. The Lycra spandex operation is considered among the standout performers at that unit, which also produces Kevlar and nonwoven products.
A DuPont spokesman said that nylon and spandex “are both key businesses in the DuPont portfolio and will be for many years.”
For polyester fibers, though, DuPont’s long-term commitment is unclear, Parker acknowledged.
“Long-term, that is a very difficult question, because a lot of it is very dependent on growth opportunities and various dynamics going on in the industry. It depends on the global dynamics of this business. This textile market has been under attack for a long time,” he said. “Those kinds of things make it very difficult to say whether this is a long-term play for DuPont or not.”
He did contend, however, that the manufacturing alliance and the option for Unifi to buy DuPont’s filament operations was “a great opportunity” for the two companies.
Asked to comment on the probability that DuPont would be engaged in the polyester fiber business five years from now, he responded, “That would require speculation on my part. This market and this business is extremely tough. I’ve been in textile fibers for 18 years now and I don’t think I’ve ever seen it more difficult than it is now.”

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