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December 09, 2015 01:00 AM

Dow, DuPont discuss possible merger

Bloomberg News
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    MIDLAND, Mich.—Dow Chemical Co. is in late-stage talks to merge with DuPont Co., people with knowledge of the matter said.

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

    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 S.E. as well as the largest seed and pesticide company, surpassing Monsanto Co. Representatives of both companies declined to comment.

    This year already has been tumultuous 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.

    Split up possible

    DuPont and Dow, which have market capitalizations of $58.4 billion and $59 billion respectively, in recent months have 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deals in that industry as lower crop prices curb farmer spending, and after Monsanto's bid for Syngenta A.G., which was withdrawn in August.

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

    The split following a Dow-DuPont merger probably would 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.

    DuPont CEO Ed Breen has a history of breaking up companies, as he did at Tyco International Ltd., Ahmed said.

    Stronger global value

    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 email. 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.

    Based on the market values of Dow and DuPont, a merger probably would 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, data shows.

    Shares of Dow rose 9.5 percent to $55.75 at 7:30 a.m. in New York before the start of regular trading. DuPont jumped 13 percent to $74.89. Swiss agrochemicals-maker Syngenta AG rose 2.6 percent to 369.50 Swiss francs as of 1:31 p.m. in Zurich while BASF was 0.7 percent lower at 70.69 euros in Frankfurt.

    Activist investors push firms

    DuPont—one of the world's largest plastics and chemicals makers—continues to deal with the fallout of a lengthy proxy war with activist investor Trian Fund Management L.P. and its founder Nelson Peltz. DuPont won that fight in May, retaining control of its board, but it still played a role Kullman's resignation.

    Dow Chemical also has been jousting with activist investors.

    Loeb's Third Point bought a stake in Dow in 2013 and called on the company to spin off its petrochemicals business—including plastics—in January 2014.

    Like DuPont, Dow made some concessions. First, it added new members to its board of directors. Then, in March, Dow announced it would combine a large part of its chlorine value chain with specialty chemicals and ammunition maker Olin Corp. to create a global materials firm with annual sales of almost $7 billion. The combination includes Dow's global epoxy business and units that make feedstocks used in PVC production.

    Liveris has defended his strategy actively.

    DuPont has struggled with lower growth and reduced profitability in recent years. When it announced Kullman's resignation, the firm lowered earnings expectations for 2015 to $2.75 per share, down from prior guidance of $3.10. It blamed the strengthening of the U.S. dollar vs. currencies in emerging markets, particularly the Brazilian real.

    Changes at DuPont

    In December 2014, DuPont sold its Neoprene polychloroprene business to Denka Performance Elastomer L.L.C., a joint venture between Denka Kagaku Kogyo K.K. and Mitsui & Co. Ltd. Financial terms were not disclosed, but a Denka spokesman said the firm spent between $80 million and $110 million to acquire the facility.

    The divestiture included its Pontchartrain Works facility in LaPlace, La., and affected 235 employees. Patrick Lindner, president of DuPont Performance Polymers, said at the time Denka would offer all affected employees employment with the joint venture.

    Linder also said that Neoprene sales comprised less than 5 percent of DuPont Performance Polymers' revenues in 2013.

    Denka Performance Elastomer was formed out of the acquisition. Its stakeholders include Tokyo-based Denka's 70 percent ownership and Mitsui, also based in Tokyo, owns the remaining 30 percent. The joint venture recently announced that its corporate headquarters would be established in La Place, creating 16 executive level jobs.

    Earlier this year, DuPont attempted to improve its results by spinning off its struggling titanium dioxide unit—as well as Teflon-brand fluoropolymers—into a separate public company, Chemours.

    Chemours recently said it is cutting its global work force by about 400, or nearly 5 percent of its total employee and contractor base, in a move that it said will cost about $45 million in the fourth quarter of 2015 but deliver annual savings of about $50 million.

    On Nov. 2, the company announced another major change that involved plastics—a plan to consolidate two of its plastics-related units into a single business. As of Jan. 1, DuPont's Performance Polymers unit will merge with Packaging & Industrial Polymers. DuPont also is merging its Protection and Building Innovations units.

    “By bringing these business units together under common management structures, we are creating business of more significant scale to better serve our customers,” Breen said at the time.

    DuPont Performance Polymers includes nylon, acetal and polybutylene terephthalate resins, as well as thermoplastic elastomers and biopolymers. Packaging & Industrial Polymers includes polymer modifiers and additives and specialty resins used in adhesives, barriers, sealants and peelable lidding; as well as the DuPont Teijin Films business.

    DuPont Teijin is North America's fifth-largest film and sheet business with estimated sales of almost $1.4 billion in 2014, according to a recent ranking by Rubber & Plastics News' sister publication, Plastics News.

    In the first nine months of 2015, DuPont's sales fell 12 percent to $19.8 billion, with operating profit down 13 percent to $3.7 billion. Performance Materials sales fell 13 percent to just over $4 billion, with operating profit down 1 percent to $935 million.

    Based on sales, Performance Materials ranked second among DuPont's six operating units in the nine-month period.

    Plastics News and Rubber & Plastics News contributed to this report.

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