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Dow Chemical, DuPont said to be in late-stage merger talks

December 9, 2015

Dow Chemical Co., the parent of  Indianapolis-based Dow AgroSciences, is in late-stage talks to merge with DuPont Co. in what would be the largest deal in the chemicals industry, people with knowledge of the matter said.

An accord may be announced as soon as this week, said the people, who asked not to be identified because the information is private. After the merger, the company would break into three businesses—agriculture, specialty chemicals and commodity chemicals—because of regulatory and other issues, one of the people said. There’s no guarantee a deal will get done and talks may still fall apart, the people said.

Based on the market values of Dow and DuPont, a merger would probably rank among the five largest deals announced this year, according to data compiled by Bloomberg. The volume of mergers and acquisitions in 2015 is already headed for a record, the data show.

The transaction would combine two of the most storied names in U.S. industry and create the world’s second-biggest chemical company behind BASF SE as well as the largest seed and pesticide company, surpassing Monsanto Co. Representatives of both companies declined to comment. The Wall Street Journal reported the merger talks earlier.

This year has already been a tumultuous one for DuPont, whose former CEO Ellen Kullman stepped down in October, about five months after winning a proxy battle waged by an activist investor. Dow CEO Andrew Liveris led the company’s recovery from near-insolvency during the financial crisis and has faced pressure from an activist shareholder—Dan Loeb’s Third Point.

Dow Agro's future

DuPont and Dow, which have market capitalizations of $65.2 billion and $65.7 billion respectively, have in recent months confirmed they were weighing options for their agricultural-chemicals businesses, both of which supply genetically modified seeds. There’s been widespread speculation about potential deals in that industry as lower crop prices curb farmer spending, and after Monsanto’s bid for Syngenta AG, which was withdrawn in August.

It’s “game of musical chairs going on between the ag-chem companies,” Hassan Ahmed, an analyst at Alembic Global Advisers, said Wednesday in a Bloomberg Television interview.

Michigan-based Dow Chemical announced earlier this year that Dow Agro could become a stand-alone company or could be sold to a competitor in the next two to three years. It's unclear what would become of the division if Dow and DuPont merge.

Dow Chemical said in October that it was exploring all options for Dow Agro, which produced $7.3 billion in revenue last year. Dow Agro employs 1,500 workers in the Indianapolis area and 9,000 worldwide.

The split following a Dow-DuPont merger would probably involve creating a company focused on agricultural products such as crop seeds and pesticides, another focused on specialty chemicals and a third that makes plastics and other commodities, according to New York-based Ahmed. Total cost savings may be $3 billion to $4 billion, he said.

“It’s going to be a cost-cutting story as well as a sum-of- the-parts story." Ahmed said.

Divestitures expected

Falling crude oil and feedstock prices have boosted profit margins for petrochemical producers, Anu Agarwal, Singapore-based Asia vice president at Argus Media, said in an e-mailed comment. Bringing the companies together would enable them to "derive value from offering a large range of chemicals to global markets,” she said.

Any antitrust issues could be overcome with modest divestitures, according to Ahmed. Dow’s Liveris would be executive chairman of the merged company while DuPont CEO Ed Breen would retain that title, according to one of the people. Making Breen CEO would fit well with his strength in breaking up companies, as he did at Tyco International Ltd., Ahmed said.

DuPont advisers in the talks are Goldman Sachs Group Inc. and Evercore Partners Inc., while Dow’s are Lazard Ltd. and Morgan Stanley, one of the people said.

Based on the market values of Dow and DuPont, a merger would probably rank among the five largest deals announced this year, according to data compiled by Bloomberg. The volume of mergers and acquisitions in 2015 is already headed for a record, the data show.

Shares of Dow rose 11.5 percent, to $56.76, Wednesday morning. DuPont jumped 12 percent, to $74.41.

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