The three companies that are to be formed after the merger between Dow Chemical Co. (ticker: DOW) and DuPont (DD) may make for an intriguing investment opportunity, should it be approved by federal regulators.
Dow and DuPont are planning to merge into a company valued at about $120 billion. The companies would then split off into three separate companies — one focused on materials, one on agriculture and a nutrition and electronics specialty products business. The plan offers a captivating investment opportunity, according to some analysts.
“I’m intrigued by the merger,” says Mike Holland, the chairman of investment firm Holland & Co. in New York. “There’s no reason to think these two companies are in any way smarter for investors than three intelligently thought-out businesses. This wasn’t something they were sitting around on a golf course trying to figure out — rather, this has been in the (planning) stage for years.”
Two stalwarts of the stock market. Dow Chemical was founded in 1897, marketing bleach and potassium bromine. The company quickly expanded its product line to become one of the world’s largest producers of agricultural products, chlorine, phenol and magnesium metals.
Today, it has a market capitalization of nearly $60 billion, operating in 180 countries and employing about 53,000 people. Dow has 6,000 product families manufactured in 35 countries.
E.I. du Pont de Nemours & Co. is a 213-year old company that rose to prominence by producing black powder. Eventually, as with Dow, it expanded its offerings and created several items now widely used, such as nylon and Tyvek house wrap.
DuPont also has a market cap approaching $60 billion, is a global company and creates dozens of product lines.
The deal. The proposed merger between the companies will result in annual savings of about $3 billion that are expected to create $30 billion worth of market value. Once the deal is complete, market cap for DowDuPont, as it will be called, is forecast at $130 billion.
The companies will spin off an agriculture company that combines their seed and crop protection businesses. Revenue between the two in the agriculture arena was about $19 billion in 2014.
Its materials segment will be composed of DuPont’s performance materials business, Dow’s performance plastics, performance materials and chemicals category and Dow’s infrastructure and consumer solutions division. Revenue in that division was $51 billion in 2014, the companies say.
The specialty products company will include DuPont’s nutrition and health, industrial biosciences, safety and protection and electronics and communications business, and Dow’s electronics materials business. Combined revenue for those businesses in 2014 were about $13 billion.
Dow CEO Andrew Liveris would become chairman of the newly formed DowDuPont board while DuPont CEO Edward Breen would retain the same title once the transaction is complete. Its board would have 16 directors — eight from each company — and will be headquartered in both Midland, Michigan and Wilmington, Delaware.
Investors may be intrigued, but they don’t seem to be too high on either company. Dow shares lost 9 percent since the Dec. 11 announcement, while DuPont shares are down about 12 percent.
Farm groups are displeased by the merger. The National Farmers Union is urging the Department of Justice to block the merger, saying it would hurt rural communities by reducing the number of companies selling crop protection and seed.
“NFU opposes the merger of Dow and DuPont for the damaging impacts it will have on farmers and rural America,” the union says. “This merger will result in less competition in the marketplace and fewer choices for farmers.”
The union is also protesting the job cuts that Dow and DuPont have already said will be coming. DuPont has announced it would reduce costs by $700 million in 2016, citing third-quarter net sales that were down 17 percent from a year ago. Dow, meanwhile reported its third-quarter sales were down 16 percent from a year ago, to $12 billion. “Reductions include a range of structural actions across all businesses and staff functions globally to operate more efficiently by further consolidating businesses and aligning staff functions more closely with the businesses,” DuPont says.
Dow also says it would take full ownership of Dow Corning, with which it has a 50-50 ownership arrangement with Corning (GLW). The transaction is forecast to yield more than $1 billion in additional annual earnings before expenses at full run-rate synergies, the company says.
While the merger will face “significant” scrutiny both in the U.S. and abroad, according to analysts at Piper Jaffray, neither Dow nor DuPont indicated they were concerned.
Looking ahead. If the merger is approved, it will likely have an impact on companies with which both Dow and DuPont have done business with for many years, says Steven Hansen, senior vice president of transportation, chemicals and fertilizers at Raymond James.
The combination will consolidate the space, giving the companies a “greater balance of power,” he says.
It could also present opportunities for agricultural retailers and independent players such as Agrium (AGU), a maker of seed, crop protection and nutrients, and companies such as Monsanto Co. (MON) and Syngenta (SYT).
“It wouldn’t say it’s a negative,” Hansen says. “It might create spinoff opportunities, and those may be good for other players in the space.”
Holland has been involved with splits in the past, and says companies splitting tend to plan well. While some investors may shy away from a three-way split after a merger, it could be a good investment opportunity.
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Dow-DuPont Merger Could Create Opportunities for Investors originally appeared on usnews.com