Dow and DuPont Merger to Create $130 Billion Chemical Giant

This story originally appeared on Reuters

Chemical giants DuPont and Dow Chemical Co decided to merge within an all-stock deal valuing the combined company at $130 billion in a win for activist investors that could spark further consolidation in the farm chemicals industry.

The offer to mix two of the largest and oldest U.S. chemical producers is a prelude to an eventual split-up of the combined company into three discrete businesses, Dow and DuPont said on Friday.

Nonetheless it will probably face intense regulatory scrutiny, given a thorough overlap of their agriculture businesses.

The proposed split would create businesses centered on agriculture, materials and specialty products.

Excluding preferred shares, existing shareholders of Dow and DuPont will each own about 50 percent of the combined company, to be called DowDuPont.

DuPont LEADER Ed Breen will be CEO of the brand new company, and Dow Chemical CEO Andrew Liveris will be executive chairman.

Dow Chemical shareholders are certain to get one DowDuPont share for every Dow Chemical share held, while DuPont shareholders are certain to get 1.282 shares in DowDuPont for every DuPont share they own.

The merger, one of the primary of the year, allows Dow and DuPont to rejig assets predicated on the diverging fortunes of their businesses that produce agriculture chemicals and plastics.

The firms have been struggling to handle falling demand for farm chemicals because of falling crop prices and a solid dollar, even while their plastics businesses have thrived because of low gas prices.

DuPont shares were down 4.4 percent at $71.25 in premarket trading, while Dow’s were down 1.8 percent at $53.92.

CONCENTRATE ON COMPETITORS

“This transaction is a game-changer for our industry and reflects the culmination of a vision we’ve had for greater than a decade to gather both of these powerful innovation and material science leaders,” Liveris said in a statement.

The firms said the split would “occur when feasible” and may likely happen 18-24 months following the deal closes, which is expected in the next half of 2016.

The combination can help the firms save about $3 billion in costs in the first 2 yrs, with the chance of saving another $1 billion, Dow and DuPont said.

The largest of the three new companies by revenue will be a material science company, which would focus on the packaging, transportation and infrastructure industries.

The combined revenue for the materials business was about $51 billion in 2014 on an adjusted basis.

The firms said a fresh specialty products company would concentrate on electronics. The combined adjusted revenue of this business was about $13 billion in 2014.

The 3rd business, selling seed and crop protection chemicals, generated adjusted revenue around $19 billion.

The merger puts further pressure on rivals such as for example Germany’s BASF SE and Bayer AG to consolidate as falling crop prices curb sales.

It might also prompt a renewed flurry of takeover bids for European rivals, with Syngenta AG the probably target.

Analysts have said a Dow-DuPont tie-up might push Monsanto Co to take another shot at Syngenta following the U.S. company abandoned a $45 billion offer for the Swiss company in August.

“The largest impact will certainly maintain the agriculture market, where in fact the seeds and crop chemical industries are to endure rapid consolidation,” SunTrust Robinson Humphrey analyst James Sheehan told Reuters on Friday.

“(The question is) how does Monsanto react to the strategic move by two of its main competitors?”

Activist investor Nelson Peltz, who has long championed splitting up stodgy conglomerates, has been pressing DuPont to split up its agriculture, nutrition and biosciences units from its building and safety materials divisions.

Investor Dan Loeb, meanwhile, has been pushing Dow to split its agri business and other specialty chemical units from its petrochemical divisions.

PRE-MERGER RESTRUCTURING

DowDuPont’s board is likely to have 16 members, with each company contributing eight directors, the firms said.

In another announcement, Dow Chemical said it could choose the remaining stake in its 50-50 jv with Corning Inc, the supplier of Gorilla Glass for iPhones.

The transaction is likely to yield a lot more than $1 billion in additional annual EBITDA at full run-rate synergies, Dow Chemical said.

DuPont, in another statement, said it could spend less by $700 million in 2016, affecting ten percent of its global workforce.

Klein and Co, Lazard and Morgan Stanley & Co LLC are Dow’s financial advisers. Evercore and Goldman, Sachs & Co are advising DuPont.

(Reporting by Swetha Gopinath, Sneha Banerjee and Darshana Shankaraman in Bengaluru; Editing by Ted Kerr)

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