Qnity and Dupont, worth buying the spin off?

Is Qnity worth buying?

In late April of last year DuPont’s management announced that they were going to split the company into three pieces.

Those three pieces were going to be a water focused business, an electronics focused business, and a stub company that would carry most of the debt allowing the other two growth areas to grow fast without being tied to a lower growth legacy business.

At the time, I did a video on the spit up and said there’s probably upside to $100 based on the multiples of the pure play peers in the three sectors. You can find that video here.

After running up to 90 in September of last year, pricing in a lot of those increased multiple DuPont has struggled. Mostly due to macro reasons, as the whole chemical space as been very weak. There has also been some updates made along the way to their split off decisions.

The moment the split was announced, DuPont received numerous phone calls to buy the water business outright, immediately. There was so much smoke around the water business that DuPont had to publicly re-state numerous times that they were not going to sell the business until it was spun off. It was going to be the smallest of the three businesses, and water technology has been a fast growing sector for chemical and treatment companies, with names like Tetra Tech and Xylem doing very well over the last five years.

The value unlock for the water business was also the primary reason for the split up. As the electronics division did receive a minor conglomerate discount, but not nearly the discount that the water business received. To give you an idea of that spread, the water business *as a part of Dupont* might have been valued at only about 30% of what its peers in the public market were trading at, depending on which comp you used. This is why there was a desire to buy the business before it hit the public markets, it allowed the buyer to capture more of the growth.

The hot topic of the water business, coupled with macro weakness put DuPont in a odd position as the calendar rolled into 2025. Because of the macro issues, the market cap of DuPont wasn’t as high as management would’ve liked. Meaning if the company split into 3 parts, it was likely only the electronics division would stay in the S&P 500 within a year or two. The water division was small and the legacy business likely wasn’t going to have enough growth to keep pace with the broad market and would get cut eventually. Management fixed these issues but announcing in early 2025 that they were going to cut the company in half, leaving the high growth water business with the legacy company, and just spin out the electronics division.

The electronics division will now be called Qnity, which is a play on the word "unity" and "Q," the symbol for electrical charge. The spin off is planned to be completed on November 1st, roughly six weeks from now.