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Banking Dow Chemical, DuPont agree to combine in merger of equals

Dow Chemical, DuPont agree to combine in merger of equals

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Dow Chemical Co. and DuPont Co., two historic giants of U.S. industry, will merge in a deal that’s the first step in a plan to create three new highly-focused businesses.

The merger, the largest ever in the chemicals industry, will combine products from both Dow and DuPont in the areas of agriculture, commodities chemicals and specialty chemicals to create the new businesses. It comes after two years of pressure from activist investors who argued that shareholders of both companies would realize greater value if they were broken up.

Dow and DuPont will combine in an all-stock deal to create a new company, DowDuPont, with a market capitalization of about $130 billion, they said Friday in a joint statement. Dow Chief Executive Officer Andrew Liveris, 61, will become executive chairman. DuPont CEO Ed Breen, 59, will be CEO of the new company.

Investors will get one DowDuPont share for each Dow share, and 1.282 DowDuPont shares for each one of DuPont. The eventual breakup of DowDuPont into three independent, publicly traded companies through tax-free spin-offs is expected over 18 to 24 months following the completion of the merger.

“This transaction is a game-changer for our industry and reflects the culmination of a vision we have had for more than a decade to bring together these two powerful innovation and material science leaders,” Liveris said in the statement.

Despite its size and complexity, the deal could overcome antitrust concerns with modest divestitures, according to analysts who track the companies. The product overlap isn’t extensive and the focus will probably be on seeds and crop chemicals, said Jason Miner, an analyst at Bloomberg Intelligence.

Even in those markets, Dow and DuPont compete against large rivals like Syngenta, Monsanto and Bayer, Miner said.

It’s been a bumpy 2015 for DuPont, whose legacy reaches back to 1802 when E. I. du Pont built a series of gunpowder mills along the banks of the Brandywine River near Wilmington, Delaware, where the company is still based.

In May, DuPont CEO Ellen Kullman won a proxy battle waged by Trian Fund Management, the activist investor co-founded by Nelson Peltz, which said a breakup of the company would save billions of dollars in costs. Breen, perhaps best known for his role in the breakup of Tyco International., replaced Kullman as CEO in November, setting up the basis for the merger.

Dow harks back to 1897, after Herbert Henry Dow discovered a new way to extract the element bromine — then a useful ingredient in medicine and photographic materials — from brine located in wells around Midland, Michigan, its current base. In the last year, It too has faced criticism from an activist investor. Dan Loeb’s Third Point hedge fund targeted the company’s failure to meet some financial targets, and urged Dow to split its petrochemicals and specialty-chemicals businesses.

The three new businesses would focus on agricultural products including herbicides and genetically modified seeds, commodity chemicals including plastics, and specialty chemicals such as those used in solar panels.

DuPont’s agriculture business accounted for $9.2 billion of revenue in the first nine months of 2015, or 41 percent of total sales, according to data compiled by Bloomberg. Dow’s unit had $4.8 billion of sales, for 13 percent of the total.

There’s been widespread speculation this year about potential consolidation in the agriculture industry as lower crop prices curb farmer spending, pressuring company earnings. Another factor has been Monsanto’s bid for Syngenta, which was withdrawn in August.

Monsanto says it’s still looking for deals. Its CEO Hugh Grant said last month that “everybody has been talking to everybody” in the industry.

The merger “answers the question as to what would be the first shoe to drop in the ongoing speculation of the Ag industry consolidation,” said Chris Shaw and Herb Hardt, analysts at Monness Crespi Hardt & Co. in New York, in a note Wednesday, before the deal was confirmed.

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