From Reuters
A potential marriage of chemicals titans Dow Chemical and DuPont would draw intense scrutiny from regulators in the United States and other countries, but Wall Street welcomed the reported merger talks, lifting shares of both companies by 12 percent Wednesday. Dow rallied to a record and DuPont was on track for its biggest daily gain in seven years as investors expressed astonishment at a possible $130 billion combination of the longtime rivals.
A tie-up would merge two agricultural chemicals businesses and fold in DuPont’s seeds business, analysts said, bringing a close look from regulators. Farmers said they were concerned about higher prices for seeds and chemicals.
“I look at it like Pepsi and Coca-Cola merging, then splitting into syrup, bottling, and snacks & sundry businesses,” said Eric Linser of Avant-Garde Advisors, which owns DuPont shares. “I was blown away …when I saw the news break.”
The combined company could split into material sciences, such as plastics used in packaging and car engines, specialty products and agrochemicals, sources said, cautioning that plans were not final. Cost synergies could reach $3 billion, CNBC reported.
The Wall Street Journal first reported on Tuesday that talks were underway.
Both Dow and DuPont declined comment on Wednesday.
Shareholders said a likely driver in the deal was DuPont Chief Executive Officer Ed Breen, a corporate turnaround expert who broke up the Tyco conglomerate earlier this decade.
Dow shares closed up 12 percent to a record high of $56.97. DuPont, a Dow Jones industrial average component, jumped nearly 12 percent to $74.49 after reaching a session high of $75.72.
“It’s like a Christmas present,” said Jack Murphy, portfolio manager with Levin Capital Strategies, speaking of the stock’s rise.
But antitrust specialists warned of potholes ahead.
“It is eye-popping,” said Steven Bizar, an antitrust expert with law firm Buchanan Ingersoll and Rooney. “I would wonder whether it would be stopped or whether major, major divestitures may be required.”
Reports of the talks broke as the Federal Trade Commission and U.S. Justice Department either killed or filed lawsuits to challenge five deals in a month.
The Justice Department killed Electrolux’s bid to buy General Electric’s appliance business, while Chicken of the Sea, owned by Thai Union, abandoned a bid to buy Bumble Bee Foods under pressure from the department. The FTC filed challenges in the past month to stop Staples from buying Office Depot as well as two health care mergers.
“JUST PLAIN NO”
In agriculture, Dupont sells about one-third of the corn and soybean seeds planted in the United States, while Dow has about five percent. “That strikes me as a just plain no,” said Peter Carstensen, who teaches antitrust law at University of Wisconsin Law School.
“I would think that the ag chemical combination is the … most problematic.”
Caleb Hamer, a farmer in Iowa who buys seed from DuPont Pioneer and herbicides from Dow, said a marriage would probably promote research into new products. But consolidation could also boost costs.
“It scares me a little bit in terms of losing competition,” he said.
The American Farm Bureau Federation (AFBF) expressed concerns about consolidation when farm profits have plunged to the lowest since 2002.
“Our membership will be very concerned about further consolidation in the ag supply space,” said AFBF chief economist Bob Young.
Outside of agricultural, Dow and Dupont compete in only a few areas and the overlap could be resolved by selling assets, said an antitrust expert who spoke privately to protect business relationships.
“It looks relatively doable,” said the expert, who added the deal would need approvals in enough jurisdictions that the review could take a year.
While the deal was described by Reuters sources as a “merger of equals,” Dow shareholders could argue for up to 60 percent of the merged company, citing its slightly larger market capitalization and higher earnings before interest, taxes, depreciation and amortization (EBITDA) over the past 12 months.
The largest of the three companies resulting from a post-merger breakup would include Dow’s leading plastics franchise and DuPont’s performance materials segment, which sells polymers and other products to automotive equipment manufacturers, said Laurence Alexander, equity analyst for Jefferies.
The 2016 EBITDA of a combined company would be about $8.2 billion, including an estimated 5 percent in cost savings, Alexander said in a note.
The second company would likely combine Dow’s infrastructure solutions unit, which sells building insulation and adhesives, with DuPont’s safety and protection business, which produces protective materials like Kevlar, Alexander said. It would have 2016 EBITDA of about $4.3 billion, after estimated savings of 5 percent.
A tie-up of Dow and DuPont’s agricultural businesses would generate 2016 EBITDA of about $4.1 billion, including 10 percent in savings, Alexander said. The new company could better compete for farmer business if Monsanto eventually acquires Syngenta.
“We think this makes it more likely that Monsanto re-approaches Syngenta,” Bernstein analysts said in an email. Monsanto withdrew a deal for Syngenta in August.
Syngenta is No. 1 in crop chemicals with 19 percent market share last year, just ahead of Bayer’s CropScience division with 18 percent.
Monsanto is the leader in seeds with a 26 percent market share, followed by Dupont Pioneer’s 21 percent.
ACTIVIST SHAREHOLDERS
For Dow Chemical CEO Andrew Liveris, a merger with DuPont would come as he faces new pressure from a major investor and an ongoing federal investigation into his spending.
Reports of a potential deal come a week before the expiration of a standstill agreement between Dow and activist investor Daniel Loeb, who promised to refrain from publicly criticizing the company for a year.
“I’m sure that played a role in the timing of this,” said analyst Robert Scelza with Key Banc Capital Markets.
Dow added four independent directors to its board in November 2014, averting a proxy fight with Loeb, who has called for a split of the company.
DuPont has faced pressure from another activist investor, Nelson Peltz, to separate its agriculture, nutrition and biosciences units from its building and safety materials divisions.
Peltz lost a proxy battle for DuPont board seats in May, before Ellen Kullman stepped down as CEO in October.
Breen would be CEO of the combined company, while Liveris would be executive chairman, the Journal reported.
