The DowPont merger: From the known-knowns to the unknown-unknowns

December 9, 2015 |

Screen Shot 2015-12-09 at 8.33.55 PM smWidely there are known as Dow and DuPont. But in a few hours, and for a few hours, they might be known as DowPont, until someone figures out a name for a gigantic $130B merger in the hopper between the two companies.

The Known-Knowns

1. DuPont and Dow both are struggling to return to growth in their agricutural divisions as China and Brazil, respectively, move into “slow-down” and “emergency reverse”. Activist shareholders see value in breaking these companies up, and separating the cyclical from the slow-growth, and so-on.

2. DuPont CEO Ellen Kullman was dispatched in an activist-shareholder coup d’etat earlier this year, and DuPont brought in Ed Breen, a deal-makers and re-striucturer, to lead the company on an interim basis.

3. Dow is known to buy out rivals in tough times, having acquired Union Carbide back in the 1990s when the fiscal seas ran heavy.

4. DuPont is more heavily exposed on the ag side, with nearly one-third of its global revenues coming from the ag business, while Dow has less than 15% coming from ag.

5. If there’s an announce, expect it as soon as Thursday morning.

6. Any sale of spun-off independent units will take several seasons — tax considerations will rule.

The Known-Unknowns

1. There are rumors swirling that the companies will be merged, then promptly broken into at least three parts — ag, speciality chemicals and performance materials being two most prominently mentioned as breakout candidates. But there could be regulatory requirements to divest certain businesses, and rivals will be watching carefully to see which pieces are spun out of the DowPont orbit.

2. DuPont Industrial BioSciences? That’s a mystery. Ideally, packaged with agriculture. Could be elsewhere. Obviously it is designed to capitalize on DuPont’s agricultural strengths and provide a new stream of fuels and chemicals.

3. Who will run the company and whose team of execs will run the broken-up bits? There’s a lot of speculation going around and most of it rhymes with “How”. But “how anyone really knows at this stage” is an even better question.

4. Will this giant merger and disassembly — a fusion followed by a fission — get approved by regulators? It would be tough to find a jurisdiction that didn’t have some claim over the matter. But US regualtors will have the biggest shout.

5. The financial impact for shareholders. Well, DuPont shares were trading up nearly 12% on Wednesday, in anticipation. For the longer term, Piper Jaffray;s Mike Ritzenthaler writes:

“By our initial math (a simple combination of the two businesses on our FY16E estimates, divvying up the various segments according to their primary end markets, and allocating potential synergies pro rata across the three new business units), the Agriculture unit would approximate $16B in sales and $3.1B in projected EBITDA before unallocated corporate costs, with ‘Specialty’ at $23B in sales and $5.6B in projected EBITDA, and ‘Materials’ at $32B in sales and $9.8B in projected EBITDA.

“We believe that $3B in cost synergies (~30% of our FY16E of the combined entity’s opex) may be compounded by the potential operational synergies if the deal is announced tomorrow as expected (and ahead of the Third Point-Dow standstill expiry on Monday). More cost-efficient operations of Dow’s more commoditized franchises, as well as Dow’s crop trait development pipeline better realizing its potential value with access to DuPont Pioneer genetics are two very compelling aspects of the potential deal. The global nature of the anti-trust hurdles are surely likely to be significant, but remedies (such as a sale of Mycogen to avoid an addition to Pioneer’s sizable North American market share) could be contemplated.

“We see the potential Dow-DuPont merger and subsequent potential split as a positive indicator for vibrant sector M&A to continue, particularly as diversified chemical industrials seek exposure to complementary product offerings within specialty chemicals, customer relationships, and particular exposure to diverse end markets. Within our coverage, we believe Chemtura (CHMT-Overweight) and WR Grace (GRA-Overweight) would represent attractive targets toward these strategic goals.”

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