Here’s What a 3M Breakup Could Look Like

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What would

3M

look like if it went down a

General Electric

-like path and broke itself up to create shareholder value? That’s a big question investors might have to wrestle with for the next few weeks, at least, if not for longer.

On Thursday, RBC Capital Markets analyst Deane Dray published his annual list of so-called capital allocation catalysts—events that could jolt investors to think about companies in a new way. The company most likely to attract activist interest, according to Dray, is 3M (ticker: MMM).

“The burdensome complexity and steep relative [price/earnings] valuation discount where [3M] shares are languishing could set the stage for an activist to push for a breakup,” wrote Dray, “along with a bankruptcy filing of its legacy chemicals business to ring-fence its potentially cataclysmic PFAS liability.”

3M didn’t respond to a request for comment about the potential to break up the company.

PFAS are a group of chemicals manufactured by 3M and others long ago that often seeped into the water supply where they were made. “Scientific studies have shown that exposure to some PFAS in the environment may be linked to harmful health effects in humans and animals,” according to the Environmental Protection Agency. Companies, including 3M, will have to clean up the water. The monetary size of the cleanup bill, and any potential product liability litigation, isn’t known.

PFAS problems, product liability litigation tied to earplugs, and slowing growth have caused 3M stock to languish. Per-share earnings in 2021 were, essentially, the same as EPS in 2018. Shares have fallen a total of almost 30% over the past three years. The

S&P 500
and

Dow Jones Industrial Average
have gained roughly 60% and 35% over the same span. Shares of

Emerson Electric

(EMR), another diversified conglomerate with a consumer-facing tools business and without large aerospace exposure, has gained almost 45% over the same span.

Aerospace has clouded comparability for industrial conglomerates for a while because of the twin impacts of the

Boeing

(BA) 737 MAX crashes and Covid-19.

The difference between 3M’s current market capitalization and its market cap if it performed exactly like Emerson stock? Roughly $90 billion. That’s why activists might be attracted. That amount of money is likely more than the value of any litigation, but the company might need a push to unlock that hidden value.

3M is a chemical and industrial technology company known for its Post-it Notes and adhesive technologies. Breaking up might result in losing some R&D synergies that cut across all businesses, but there are lines of demarcation that might make sense for an activist to point out.

3M could become three companies: One dedicated to healthcare, one to industrial end markets, and one dedicated to consumer end markets, Dray tells Barron’s. 

The consumer business would include the Post-it Notes. 3M’s consumer business generated about $5.9 billion in sales in 2021 and about $1.4 billion in Ebitda, or earnings before interest, taxes, depreciation, and amortization. If the consumer business traded like, say,

Procter & Gamble

(PG), it would be worth roughly $25 billion.

The industrial business segments generated about $22.7 billion in 2021 and $5.7 billion in Ebitda. If that business traded like Emerson, it would be worth $74 billion.

The healthcare business generated about $9 billion in 2021 sales and $2.8 billion in Ebitda. If that business traded like a healthcare equipment provider in the S&P 500, it would be worth perhaps $45 billion.

Adjusting for debt and some corporate overhead, the three companies could be worth almost $130 billion. That’s $45 billion, or almost 60%, higher than where the stock trades today. Some of that would likely be eaten up with PFAS and earplug costs, but that 60% number is, essentially, what might attract an activist.

General Electric

(GE) announced its plan to break up into three companies back in November. The decision hasn’t yet generated the value envisioned by CEO Larry Culp, and GE stock is down about 15% since the announcement. The S&P 500 and Dow are down about 2% and 4%, respectively, over the same span.

3M stock isn’t yet reacting to Dray’s idea. Shares closed down 1.7% at $148.88 Thursday. The S&P 500 closed down 1.6%.

Dray, for his part, isn’t a 3M bull. He rates shares Sell and has a $155 price target for the stock. Overall, 3M isn’t very popular on Wall Street these days. Only about 10% of analysts covering the company rate shares Buy. The average Buy-rating ratio for stocks in the S&P is about 58%.

All the recent declines have left 3M stock trading for about 14.4 times estimated 2022 earnings. The S&P 500 trades for about 20 times. Three years ago, 3M stock traded for about 20 times estimated current-year earnings.

Write to Al Root at [email protected]