Du Pont eyes diluted stake in photomasks

Electronic News, June 12, 1995 by Jeff Dorsch

WILMINGTON, DEL.--Nine years after entering the photomask business with the acquisition of Tau Laboratories, Du Pont is lessening its involvement in mask-making with plans to restructure the ownership of Du Pont Photomasks through a possible initial public offering by the subsidiary. In the event of an IPO, which may come later this year, Du Pont is expected to retain majority ownership in the subsidiary, but it may eventually reduce its stake to a minority position.

Du Pont may not be able to bail out of the capital-intensive, technologically-demanding mask business with an outright sale of Du Pont Photomasks without running the risk of alienating mask customers who buy other products from its Electronic Materials group--a $1 billion business. Morgan Stanley is helping Du Pont Photomasks put together a would-be IPO over in the next six to nine months.

"We're evaluating several options and our preference at this time is toward a publicly-held company in which Du Pont would retain a significant stake," Du Pont senior VP Charles O. Holliday said last week. "Producing and supplying photomasks requires very fast cycle time, continuous capital investment and a narrow but sharp focus on the market dynamics and rapidly changing customer needs. We think we can accomplish that best with a stand-alone company, totally focused on the photomasks market, but one in which Du Pont materials, research and other resources remain accessible.

"While this is a good business, it does not fit neatly into Du Pont's portfolio of core businesses. This restructuring is a creative move designed to position the business to reach its full potential, to continue to provide superior service to its customers and to utilize the highly skilled and highly motivated people who embody Du Pont Photomasks today. It also provides Du Pont ongoing access to the semiconductor industry."

Du Pont Photomasks had 1994 revenues of about $150 million and was profitable, according to John C. Hodgson, managing director and GM of Du Pont Electronic Materials. Besides photomasks, the subsidiary sells photoblanks, the unpatterned glass from which masks are made, and pellicles, which protect masks from scratches and microcontamination.

Du Pont business director Peter G. Kehoe was named by the parent company to lead the photomask restructuring task force and to develop the transition plans. "While it is difficult to say how long it will take to put the new structure together, we want to do it as expeditiously as possible so the business can focus all its efforts on the marketplace," said Mr. Kehoe.

Preston M. Adcox, managing director of Du Pont Photomasks, and his current management team will continue to focus attention on ongoing business operations, Du Pont said. The restructuring of the photomask business will have no impact on the printed circuit and microcircuit businesses of the Electronic Materials group, it added; other group products include dry film resists and flexible circuits.

The capital requirements of the mask business are "problematical," Mr. Hodgson said. "From a structural point of view, it's not the best of all worlds." For example, the newest Mebes 4500 and the Alta 3000 mask-patterning equipment from Etec Systems (in which Du Pont also has an ownership stake), are priced at about $6 million and $5 million, respecitvely.

The high cost of competing in photomasks was, however, "only one of a number of elements" in Du Pont's decision, Mr. Hodgson said. The company also took into account competitive pressures and the business' relation to Du Pont's asset base. "We've been doing strategic analysis on all of the businesses in the Electronic Materials group," he added, and that led to the restructuring.

Du Pont made a "conscious decision" against selling the photomask subsidiary, Mr. Hodgson said. "Selling this was removed as an option some time ago." Du Pont has not approached Dai Nippon Printing, one of the largest competitors in the mask business and Du Pont's marketing partner in mask-making, about a possible purchase of the business, he added.

"The IPO is the best approach," the Du Pont executive said. "We want to retain a relationship with the Intels, Motorolas and TIs of the world."

While Du Pont expects to retain a majority ownership in Du Pont Photomasks following the IPO, the long-term ownership plans are "yet to be defined," Mr. Hodgson said, while indicating Du Pont will eventually let its stake dwindle to a minority position.

The prime beneficiary of the possible fear, uncertainty and doubt surrounding the future of Du Pont Photomasks will likely be Photronics, the company's leading competitor in the U.S. Du Pont led Photronics in mask revenues until late last year, when Photronics acquired the Hoya Micro Mask business. Although Photronics' annual revenues are lower than Du Pont Photomasks--$130 million to $150 million--Photronics sells only masks, while Du Pont Photomasks derives a substantial portion of its business from blanks and pellicles.

Constantine Macricostas, Photronics' chairman and CEO, has predicted for years that Du Pont would get out of the mask business. "We're excited," he said last week. "We're about two to three years too late, predicting they will get out... Eventually, they're going to get out completely. We love it, really."