Chemical giants DuPont DD and Dow Chemical DOW are in late-stage talks to combine their businesses, the Wall Street Journal reported yesterday. The report said that the companies could announce a merger deal in coming days, citing people familiar with the matter. Shares of both companies gained in extended trading yesterday.
The sources also told the Journal that the merger would be followed by a three-way breakup of the integrated company. The combined company could split into agricultural, material sciences and specialty-products businesses, the sources revealed. Dow’s CEO Andrew N. Liveris is expected to be the executive chairman of the combined company. DuPont’s CEO Edward Breen is expected to retain his title at the new entity.
The merger, which if eventually takes place, would create a chemical powerhouse with combined market value of around $120 billion. The deal would see the union of two top American chemical companies that have been in business for more than a century. It would also rank among the biggest mergers and acquisitions (M&A) deals announced this year, the Journal report noted.
However, there is no guarantee that a merger deal would take place and talks could also fall apart. The deal, if any, would also need regulatory clearances in several countries, Reuters reported. Both companies declined to comment on the matter.
DuPont’s shares shot up 6.2% in after-hours trading yesterday while Dow gained 5.5%.
Both DuPont and Dow are feeling the pinch of falling commodity prices. DuPont, which remains hamstrung by sustained weakness in its agriculture business, was reportedly looking to cut major agricultural deals with Dow and Syngenta SYT last month. Wall Street Journal reported that Syngenta was in discussions with DuPont about a possible merger with the latter’s agriculture unit. Moreover, DuPont was reportedly in talks with Dow for another potential agriculture deal.
In a bid to cope with the prevailing low commodity price environment, agricultural chemical companies are looking for cost synergy opportunities and enhanced operational scale through consolidations.
Deal talks among major agricultural chemical players are heating up since Monsanto MON ended its pursuit of Syngenta in Aug 2015. Monsanto dropped its $46 billion takeover bid for Syngenta after the latter rejected the offer stating that it significantly undervalued the company. The merger would have created the biggest player in the world for seeds and crop chemicals.
The discussions have also gathered steam as U.S. farm income is set to tumble to its lowest level since 2006 this year. According to the U.S. Department of Agriculture, U.S. farm income is expected to skid 36% in 2015. The projected decline reflects continued downturn in crop prices amid expectations of bumper harvests by U.S. farmers.
Lower crop prices are weighing on DuPont's profits. The company remains exposed to a challenging operating environment in the agricultural market. Its profits tumbled year over year in third-quarter 2015, hurt by bigger operating loss in its agriculture business. DuPont also faces significant currency headwinds, stemming from continued strengthening of the U.S. dollar versus currencies in emerging markets, mainly the Brazilian real.
Edward Breen noted in the third-quarter call that the company will take a fresh look at its cost structure and capital allocation strategy to improve returns to shareholders.
Under the leadership of its former CEO Ellen Kullman, who retired in Oct 2015, DuPont faced intense pressure from legendary activist investor Nelson Peltz’s Trian Fund Management. Trian pushed the company to break itself up into two distinct entities through the separation of its high-growth businesses such as agriculture and nutrition & health from its cyclical businesses. However, DuPont prevailed in a prolonged proxy battle with Trian in May 2015 after its shareholders elected all of its 12 director nominees at its 2015 annual meeting while rejecting the Trian nominees.
On the other hand, Dow saw a double-digit year over year decline in sales in its agriculture business in the third quarter, dragged down by lower agricultural commodity prices. Dow, in its third-quarter call, noted that it will remain focused on executing its aggressive portfolio management initiatives.
Dow also came under pressure in early 2014 after activist investor Dan Loeb's Third Point hedge fund (a major shareholder) urged the company to spin off its sluggish petrochemicals business and focus instead on high-margin, fast growing businesses with a view that the move will create more value for the shareholders.
However, Dow and Third Point entered into a crucial peace accord in Nov 2014, under which, the former agreed to add four new, independent directors to its board (including two suggested by Third Point), thus averting the possibility of a board seat battle between them.
Both DuPont and Dow remain focused on optimizing their portfolio amid the prevailing difficult operating backdrop. DuPont, as part its aggressive portfolio management actions, completed the separation of its struggling performance chemicals unit in Jul 2015 through the spin-off of The Chemours Company. The separation marked DuPont's transformation to a company which is more growth-driven, more science intensive and less cyclical.
Dow is also selectively spinning off or selling its underperforming assets and gradually shifting to high-growth markets. The company, in Oct 2015, closed the separation of a major portion of its chlorine value chain and merger of those businesses with chemical maker Olin Corp. The divestment represents a significant part of Dow's aggressive portfolio management actions as it is looking to move away from cyclical commodity chemicals businesses.
DuPont currently carries a Zacks Rank #3 (Hold), while Dow Chemical is a Zacks Rank #2 (Buy) stock.
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