Activist investor Dan Loeb is calling for the ouster of Dow Chemical’s DOW CEO Andrew N. Liveris, according to a Wall Street Journal report. Loeb, the founder of Third Point hedge fund, has urged Dow to remove its CEO questioning the timing of the announcement of the chemical giant’s merger with DuPont DD.
Last Friday, Dow and DuPont formally announced their plans to combine their businesses to create a chemical titan dubbed “DowDuPont” with a combined market value of around $130 billion, before eventually splitting into three standalone companies. The two stalwarts of American industry agreed to merge in an all-stock deal that has been unanimously cleared by the boards of both companies.
The planned merger – the largest deal ever in the chemical industry – will see the union of two of the America’s oldest companies with more than three centuries of combined history. Under the deal terms, shareholders of Dow and DuPont will each own about 50% of DowDuPont, excluding preferred shares. Liveris will be the Executive Chairman of the combined company while DuPont’s Chair and CEO Edward Breen will retain his title at the new company.
The merger, however, would be followed by a breakup of the integrated company into three independent, publicly traded companies through tax-free spin-offs. The combined company would split into pure-play agricultural, material science and specialty products businesses that will be leading players in their respective fields. The breakup is expected to take place 18-24 months after the completion of the deal, which is expected in second-half 2016, subject to regulatory and shareholder clearance.
Dow announced yesterday that its board, including two designated directors of Third Point, unanimously and fully supports the merger and the planned breakup.
While Loeb supports the mega-merger, he questioned the timing of the deal in a private letter to Dow’s board last Saturday, the Journal reported. Loeb expressed his concern that the deal may have been rushed to be finished ahead of the expiration of a one-year customary standstill agreement that barred him from making any public comment on Dow. The standstill agreement expired this past weekend.
Loeb, who earlier criticized Liveris’ personal spending and strategies, also said in his letter that Liveris should not have any role in the merged company and naming him Executive Chairman was an “insult to Dow shareholders”, according to the Journal.
Dow’s shares slipped 3.9% to close at $51.29 yesterday.
Dow came under pressure in early 2014 after Third Point bought a roughly 2% stake in the company. Loeb urged Dow 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 company’s shareholders.
However, Dow and Third Point entered into a crucial peace treaty 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. Third Point also agreed to a one year standstill agreement, under which, both companies agreed to refrain from making any public comment on the matter. The agreement came after Third Point increased pressure on Dow with its demand for board seats and followed several negotiations between Liveris and Loeb.
The proposed ‘merger of equals’ came as a survival strategy as both Dow and DuPont are feeling the pinch of the commodity price slump, weak demand for agricultural chemicals and headwinds from a stronger dollar. These headwinds have weighed heavily on their sales and profits this year.
The merger is expected to deliver cost synergies of around $3 billion, expected to be achieved with the first two years after the deal closure. Around $1 billion of additional growth synergies are also expected to be achieved from the deal.
Dow is a Zacks Rank #2 (Buy).
Other companies in the chemicals space worth considering include Celanese Corporation CE and Innospec Inc. IOSP, both sporting a Zacks Rank #1 (Strong Buy).
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