Dow-DuPont Merger Raises Alarm

Shake-ups Appear Inevitable in Several Chemical Markets, Led by Agriculture

11.01.2016 -

In the worldwide chemicals sector, the proposed merger of US giants Dow Chemical and DuPont announced mid-December and the new company’s subsequently planned break-up into three new standalone entities is causing turmoil even before it takes place – or doesn’t.

Some analysts believe the deal aimed at creating a new company called DowDuPont and initially expected to have a market capitalization of $130 billion is simply too big to be accepted by antitrust authorities without major divestments. Others are not that sure. Whatever the outcome, a number of markets look likely to be shaken up.

As part of the merger formalities, the plan is for Dow shareholders to receive one share in the new company for each of their Dow shares, with DuPont shareholders receiving 1.282 shares for each of their DuPont shares. The new company’s board of directors would have 16 members, eight from each of the currently separate boards.

Largest of the three units created by the envisaged cell division of Dow and DuPont would be the $51 billion Material Science entity. Comprised of bulk products, including plastics, it would take a backseat only to Germany’s BASF, global chemical market leader in terms of sales.

The carve-out causing the most ripples would be the Agriculture unit with sales of $19 billion. Before any potentially mandated divestments take place, the new chemical player would become the world’s largest producer of seeds and industrial chemicals as well as third largest in crop protection. This vision alone – whatever the outcome of the cartel probe – has struck fear and trembling into the heart of the market’s players. 

In advance of the merger’s closure – pegged for the first half of 2016, a time frame not a few regard as overly ambitious in view of the need for antitrust authorities to investigate market positions – M&A activity in the  sector has already begun gearing up in anticipation of a market upheaval.
Swiss agrochemicals major Syngenta, which has been squeezed between suitors Monsanto and ChemChina and is also under pressure from shareholders to sell out to boost the share price, sees its independence in peril. In view of what is happening, “going it alone is hardly possible," board chairman Michel Demare said in a Swiss interview.

Little discussed up to now is the future of the new $13 billion Specialty Chemicals company, whose diverse products range from health & nutrition to electronics. Many analysts think a further break-up here is inevitable.

Outwardly, the CEOs of the two chemical groups have exuded confidence about their “get-together,” which they believe will generate $3 billion in cost savings through synergies upfront. Both companies have been pursued by activist shareholders seeking a break-up, and with their December announcement the two corporate leaders undoubtedly wanted to declare “fait accompli” before any interested parties could formulate oppositional strategies.

“When I look at DuPont and Dow, I see businesses that fit together like hand and glove,” Breen said, commenting on the plans. “There is very little overlap.” For Liveris, the purported masterminded behind the deal, “it 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.”

Ahead of their business combination, the two US chemical producers are putting their respective houses in order. Dow has agreed to take over 100% of its Dow Corning, its long-time 50:50 joint venture with Corning. It also has made progress in divesting stakes in its joint ventures in Kuwait –just before Christmas selling its interest in MEGlobal to Equate Petrochemical. It has been mum on potential job cuts, though its workforce in Michigan is on its toes.
DuPont has launched a $700 cost savings program and unveiled plans to shed 10% of its global workforce. In line with earlier statements that 10% of the cost savings would come from R&D, the Delaware-based company at the beginning of the new year indicated it will eliminate hundreds of high-level jobs at local R&D hubs, a realignment it said would go hand in hand with an overhaul of the entire research structure.

The company’s home state will bear the brunt of the workforce cuts, which will total 25%, or 1,700 positions. In compensation, DowDuPont has promised to headquarter the Specialty Chemicals company in the state. Another shock to Delaware was the December announcement of plans by the DuPont Pioneer seeds joint venture to leave the state in March.

Some of the lost jobs on the US eastern seaboard may be moved to Pioneer’s base at Iowa in the Midwest. However, the announcement that the joint venture intends to forego $13.3 million in state tax credits for a $138 million seeds expansion, as it is unable to guarantee to create the 305 jobs required to secure the funding is seen as unsettling.

The supervisory boards of parties to the planned merger have unanimously approved the proposals. DuPont’s activist shareholder, Nelson Peltz, whose Tritan Management Fund battled former CEO Kullman for months unsuccessfully but won in the end, applauded the deal.
While Dow was quick to point out that even the directors named by its own activist shareholder Daniel Loeb supported the board’s vote, Loeb himself took umbrage at the designation of his old nemesis Liveris as head of the company and called for his removal.

The appointment is “a slap and an insult to Dow shareholders,” the hedge fund manager told the Wall Street Journal. Loeb was especially suspicious that the merger was declared a done-deal the day before a silence agreement between him and the Michigan-based chemical producer – in which he was barred from criticizing the company or buying new shares – ended.