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 The "deal of three centuries," as Wells Fargo analyst Frank Mitsch
dubbed it, combines two of the biggest and oldest U.S. chemical
producers and will generate cost and tax savings.
Dow and DuPont shares fell on Friday after spiking earlier in the
week following reports of negotiations.
The deal, announced on Friday, will face intense regulatory
scrutiny, analysts said, especially over combining their
agricultural businesses, which sell seeds and crop protection
chemicals, including insecticides and pesticides.
Executives from both companies said the agrichemicals businesses
have little overlap and any asset sales would likely be minor.
Potential tax savings were one reason for the complicated
merger-before-breakup deal, analysts said. "They need to merge first
in order for the subsequent spinoffs to qualify as tax-free
transactions in the United States," said SunTrust Robinson Humphrey
analyst James Sheehan.
Dow shareholders would own 52 percent of the new company after
preferred shares are converted, the companies said. The agreement
includes a $1.9 billion termination fee under specified
circumstances, such as rejection by shareholders.
The merger, one of the biggest of the year, would allow Dow and
DuPont to rejig assets based on the diverging fortunes of their
businesses.
The companies have been struggling with falling demand for farm
chemicals due to slumping crop prices and a strong dollar, even as
their plastics businesses thrive thanks to low natural gas prices.
Activist investor Nelson Peltz of Trian Partners, who has pressed
DuPont to separate its businesses, said he "fully supports" the
transaction and sees the combination as "a great outcome for all
shareholders."
The chemical majors felt compelled to combine due to a lack of
growth opportunities, said Key Private Bank analyst Rob Plaza.
"I think the big catalyst would have been (DuPont Chief Executive
Ed) Breen coming in, his track record of extracting value from
companies, and the fight that DuPont had gone through with Nelson
Peltz," Plaza said. "We may see more consolidation."
"GAME-CHANGER"
DuPont, which is 213 years old, makes products used in
petrochemicals, pharmaceuticals, food and construction. Its brands
include Kevlar and formerly Teflon, now part of Chemours Co, which
it had spun off.
The 118-year-old Dow makes plastics, chemicals, hydrocarbons and
agrichemicals. It manufacturers Styrofoam insulation products and
chlorine products, used in paper, pulp and soap. Dow also will
assume full control of silicone products maker Dow Corning, its
joint venture with Corning Inc.
The three-way split into material sciences, specialty products, and
seeds and agrichemicals, is likely to occur 18 to 24 months after
the merger deal closes.
Credit rating agency Moody's reaffirmed its A3 rating for DuPont,
but changed its outlook to negative, citing among other factors the
complexities of combining the agricultural businesses. It kept Dow's
ratings at Baa2 and outlook stable.
"VERY SUPPORTIVE"
The proposed merger puts pressure on rivals such as BASF and Bayer
AG to consolidate as falling crop prices curb sales.
"The biggest impact will certainly be in the agriculture market,
where the seeds and crop chemical industries are to undergo rapid
consolidation," SunTrust's Sheehan said.
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It could also prompt a renewed flurry of takeover bids for European
rivals, with Syngenta AG the most likely target.
Monsanto Co may take another shot at Syngenta, according to
analysts. It abandoned a $45 billion offer for the Swiss company in
August.
Monsanto said Friday it would not act rashly and likes its position
in the marketplace.
Rivals such as Bayer, BASF, Solvay SA and Eastman Chemical Co might
benefit in the near term while Dow and DuPont integrate, said Nomura
analyst Aleksey Yefremov. He noted the two companies' cultures
differ, with DuPont more "research and growth-driven" and Dow
focused on tight cost controls and reasonable innovation.
"There is a big execution risk," Yefremov said. "It's a very large
transaction."
One DuPont shareholder described the deal as merely "OK."
"Our initial take is, given the commodity nature of Dow’s business
and the resulting low barriers to entry, the valuation is not
obviously attractive," said Grayson Witcher, portfolio manager at
Mawer Investment Management Ltd.
DuPont, part of the Dow Jones industrial average, closed down 5.5
percent to $70.44 on Friday. Dow Chemical was off 2.8 percent at
$53.37. Major market indexes closed down about 2 percent and posted
their biggest weekly losses since August.
REGULATORY SCRUTINY
U.S. antitrust enforcers will not look at the deal as simply a
combination of two conglomerates but examine their many products to
determine where competition will be lost. Regulators will be
especially concerned about the agricultural sector, which could see
big divestitures, antitrust experts said.
"It's hard to know whether the fixes would work," said John Taladay
of law firm Baker Botts LLP.
Diana Moss, president of the American Antitrust Institute, said
there could be problems in dominance of seed sales.
"The (seed) market is already dominated by Monsanto. You're almost
creating a duopoly in the market, and that's a problem," she said.
The U.S. Senate Judiciary Committee, which has jurisdiction over
antitrust policy, will listen to farmers' concerns, Chairman Chuck
Grassley said in a statement.
"DuPont and Dow are two titans of American industry and the proposed
merger demands serious scrutiny," he said.
Klein and Co, Lazard and Morgan Stanley are Dow's financial
advisers. Evercore and Goldman Sachs are advising DuPont.
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