Shares in Kerry Group fell by just under 3 per cent after it emerged that the Irish food company had lost out in its bid to buy the nutrition business of US chemicals group DuPont.

Rival International Flavors and Fragrances (IFF) has reached a $26.2 billion (€23.5 billion) agreement with DuPont for the business, with Kerry missing out on a deal that would have been one of the biggest carried out by an Iseq listed company.

When asked for a reaction to missing out on the DuPont deal, Kerry said its policy was not to comment on its mergers and acquisitions strategy.

IFF’s shares declined after the company reached agreement to acquire the DuPont unit, prevailing over three other bidders as it expands in the food-ingredients business.

The transaction will create a new company comprised of the bidder’s assets and DuPont’s nutrition business. The entity will have an enterprise value of $45.4 billion, with DuPont shareholders getting a 55.4 per cent stake and IFF shareholders getting 44.6 per cent, the companies said in a statement Sunday after Bloomberg News reported the deal was near.

Shares of IFF fell as much as 7.1 per cent to $124.50 on Monday. The deal, the biggest ever for the New York-based company, looks expensive, according to Bloomberg Intelligence analyst Christoper Perrella.

“They are really reaching,” Perrella said in a phone interview. “Frutarom is just a year old, and that acquisition didn’t go as well as expected.”

Last year, IFF bought Israel’s Frutarom Industries Ltd for $7.1 billion as it chased industry leader Givaudan SA.

Growth prospects

With DuPont struggling this year, analysts questioned the new company’s growth prospects during a conference call about the deal on Monday. DuPont Chairman Ed Breen said there were “three highly motivated bidders.” DuPont shares rose as much as 2.8 per cent on Monday before paring most of the gain.

Businesses are tapping into so-called wellness products as consumers become increasingly health-conscious. IFF makes flavours and fragrances for food, personal-care and household products. DuPont’s unit specialises in products such as sweeteners and emulsifiers to dairy cultures and dietary fibres, and has seen growth in areas such as plant-based meats and probiotics.

IFF management said the two companies complement each other and told investors not to expect a great deal of scrutiny over antitrust matters. The company will be an “immediate leader” in health products, according to the statement.

DuPont has felt pressures amid a stock decline of about 15 per cent this year. Earlier this month, the shares closed at the lowest level since 2016. IFF shares had been little changed in 2019 before Monday’s decline.

For DuPont, the agreement extends a dramatic overhaul of the company’s portfolio as it looks to salvage shareholder value in the face of the US-China trade war that has crimped growth.

DuPont has been transforming itself following the breakup of DowDuPont, the chemical giant created in a 2017 megadeal. That colossus has now split into three, as the Dow division was spun off earlier this year followed by the agriculture business, now called Corteva Inc.

The transaction is structured as a Reverse Morris Trust, reflecting the desire of DuPont’s Breen and Chief Executive Officer Marc Doyle for a tax-efficient option to reward shareholders after the nutrition business had wallowed within the diversified company.

DuPont will receive a one-time cash payment of $7.3 billion once the deal is completed, expected in the first quarter of 2021. IFF CEO Andreas Fibig will be chairman and CEO of the new company, with Breen as the lead independent director starting in June 2021. The board will have 13 directors, including seven from IFF, until 2022, when the total drops to an evenly split 12.

Rival Bidders

IFF had competition from Kerry Group, the milk and cheese producer that has long wanted to expand in healthy bacteria strains, ingredients found in dietary supplements, cheese and bakery products, and nutritional products that claim to have some sort of role in assisting in disease treatment or prevention. Kerry shares fell 2.7 per cent to €109.80 in Dublin trading.

The food-flavouring industry is consolidating as growth slows and flavour makers contend with volatile raw-materials prices. The Frutarom transaction is still absorbing IFF management time and has increased leverage. Switzerland-based Givaudan paid $1.6 billion for Naturex in 2018, while German rival Symrise AG has also been snapping up companies in recent years.

The DuPont purchase would make “strategic sense, allowing IFF to offer a more complete product suite to a broader customer base,” according to Mark Astrachan, an analyst at Stifel.

However, Seaport Global Securities analyst Brett Hundley said last week that an IFF deal would be “fraught with risk,” noting that the combined company would have a large pro-forma debt load of more than $12.5 billion.

On a pro forma basis for 2019, the new company would have revenue of $11 billion for 2019 and $2.6 billion in earnings before interest, taxes, depreciation and amortization. The companies expect more than $300 million in cost savings by the third year after closing.

The deal is subject to approval from IFF shareholders.