A last-minute hurdle for Dow-DuPont deal?

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It’s been a long road since Dow Chemical and DuPont announced in December they planned to combine the two companies in a deal worth about $130 billion.

It was a move that raised big questions about the future of Indianapolis-based Dow Agrosciences and its 1,500 workers here.

Now, the process is nearing the final act. Or is it?

Shareholders from both companies will vote on the deal on July 20. Naturally, the boards of Dow and DuPont are strongly recommending that shareholders vote yes. Both companies already have sent out ballots, reserved meeting rooms and written speeches.

But not so fast.

The Department of Justice’s antitrust division is still reviewing the deal, and this week, one of the nation’s most powerful senators asked the antitrust to give everything a good, hard look.

And throat-clearing like that could cause policymakers and Wall Street to take a second look.

Sen. Chuck Grassley, Republican of Iowa, said the deal could harm small agricultural companies and hurt seed and chemical prices for farmers and consumers.

“I am concerned that this transaction will decrease competition in an agriculture sector that has already been subject to a number of waves of consolidation in recent years,” Grassley said in a letter Tuesday to the Justice Department.

He added that the merger might raise barriers to entry for small companies and harm innovation. It could also lock up technology.

“I have heard concerns that the merger will vertically integrate traits, seed and chemicals, which will make it more difficult for smaller biotechnology companies, independent producers and independent crop input companies to compete,” Grassley wrote.

He pointed out that the deal is happening as the agriculture industry is undergoing big ownership changes.

According to the Des Moines Register, Grassley said the impetus for his letter came from Iowa town hall meetings, where numerous farmers expressed concern about how mergers could affect them. Iowa produces more corn, soybeans, ethanol and pork than any other state, the newspaper said.

Dow agreed in December to merge with DuPont and form the world’s largest agriculture business, with combined agriculture sales of about $18 billion. The two companies said in December they would squeeze out $1.3 billion in cost savings from merging the ag units, but they have not estimated how many layoffs will occur.

The plan is for the two companies to merge, then to split into three separately traded companies focused on agriculture, material science and specialty products.
In February, the two companies said that Wilmington, Delaware, will be the future for their combined agricultural business, but that Indianapolis will be one of its two “global business centers.”

It wasn’t clear how that designation would affect employment at Dow Agro, which employs 1,500, many of them highly paid executives and researchers.

But Grassley’s letter raises questions about whether the deal is still on track to close by the end of the year – if at all.

Capitol Forum, a Washington publication that studies antitrust issues, interviewed nearly a dozen antitrust, bankrupcty and tort lawyers, along with industry experts.

In a June 14 analysis, the publication conclude that the Department of Justice “is unlikely to overlook” the Dow-DuPont market dominance in agrosciences. Big overlaps in each company’s agricultural portfolios is “likely to drive” at least some required divestitures.

Still all of that is “unlikely to foil the merger,” the publication said, although concerns could slow it down.

“Finding buyers positioned to restore price and innovation competition, especially given already highly concentrated markets, may represent the parties’ most substantial hurdle to obtaining DOJ clearance.”

Other business issues could “prove a roadblock,” the publication said, “especially given substantial political sensitivity around agricultural markets.”

Not all observers share that dark outlook.

RBC Capital Markets says it expects the deal to stay on course, in light of the Securities and Exchange Commission’s recent approval of the companies’ scheduling shareholder meetings.

“We view this as another indication that the merger remains on track to close by year-end,” analyst Arun Viswanathan wrote June 10. “We continue to remain positive.”

Dow Agro officials in Indy referred questions to Dow Chemical headquarters in Midland, Mich. Rachelle Schikorra, a spokeswoman for the chemical giant said the deal is “good for farmers and consumers.”

And she added, in perhaps a bit of understatement: “We anticipate that the regulatory review will be a thorough process.”


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