DuPont, Dow Mulling Merger To Create $120 Billion Chemical Giant

DuPont, Dow Mulling Merger To Create $120 Billion Chemical Giant
Chart via S&P Capital IQ

According to knowledgeable sources who spoke to the Wall Street Journal on Tuesday, Dow Chemical and Dupont Co. are seriously considering a merger of equals.

The sources say the two giants of the U.S. chemical sector could announce a merger in the next few days. The merger deal would eventually lead to a three-way breakup of the new, combined company, they also noted. Dow Chemical CEO Andrew Liveris would become executive chairman of the new company, with DuPont CEO Edward Breen remaining as chief executive.

The sources emphasize, however, that a deal has not been finalized and the negotiations, although advanced, still have a few sticking points to be overcome.

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If a Dow Chemical and Dupont merger does become reality, it would be yet another blockbuster deal in a year of big deals. In fact, based on data from Dealogic, firms have struck some $4.35 trillion of takeovers in 2015, just this week passing 2007 as the most active year ever for mergers and acquisitions activity in terms of total dollars spent.

The companies each have a market cap of around $60 billion, so the merger would create a $120 billion chemical giant with over $90 billion in total annual sales.

In November, the WSJ reported:

DuPont is also separately discussing a potential alternative agriculture deal with Dow Chemical Co., which is exploring a sale of its seed and pesticide unit, another person familiar with the matter said.

The discussions are at an early stage and may result in no deal, the people said.

At the time Deutsche Bank research stated:

This is not a surprise as several players recently confirmed that “everyone is talking to everyone”. We believe discussions have been accelerating following a series of events which have created a sense of urgency amongst the players, fearing to be left out if competitors move faster: Monsanto’s failed attempt to take-over SYNN (and the subsequent SYNN shareholders’ angst), Dow’s actively exploring strategic options for its ag business and recent management changes at DD and SYNN, with both interim CEOs perceived by the market as being more “pro-deal” than their predecessors.

Whilst we still believe a MON/SYNN deal would make strategic sense and is not off the table, we have always been of the view that a combination between SYNN and DD’s ag business would make sense strategically and culturally

FT Alphaville noted in January 2014:

You don’t have to be much of an investment banker to then see the potential for a Dow Ag and DuPont Ag merger.

And more recently in a December 4th 2015 note, RBC Capital stated:

Widely discussed Ag consolidation is on the table and DuPont appears to be approaching the situation with a sense of urgency. MON-SYNN catalyzed industry wide discussion and DuPont made it clear they want a suite of options to choose from and see greater value moving sooner rather than later. In our opinion, DuPont and MON are likely buyers and DOW and SYNN are potential sellers and DuPont does NOT want to be on the outside looking in when prime assets are on the table. Adding complementary trait technology and crop protection market share are two large drivers DuPont will consider if/when it makes a move. However, management emphasized DuPont remains open to any and all options.


On the M&A front, DuPont is open to any and all options. That said, we still believe, along with apparently everyone else that the primary focus is on Ag. DuPont wants to ensure it has the best options available and does not want to be the odd man out if other players start making moves. DuPont indicated it would be comfortable taking leverage up and moving out of its current A-/A3 rating if the right return opportunities presented themselves. Therefore, all else equal, if DuPont is willing to lower its credit rating, DuPont could potentially take leverage up a full turn (from 1.1x 2016 net debt/EBITDA to 2.1x). However, the catch is DuPont needs to maintain easy access to commercial paper markets in order to finance large working capital swings in its Ag business.

More on possible Dupont – Dow merger

As noted by Valuewalk, both companies have been actively restructuring themselves over the last year or two under shareholder pressure to boost profits. Of note, the WSJ report a few weeks ago that DuPont was looking at a possible merger of its agriculture division with Syngenta AG, while also looking at an alternative agriculture deal with Dow. Keep in mind that Monsanto Co. abandoned its $46 billion bid for Syngenta given resistance from the Swiss firm.

A source pointed out that Liveris has sought a deal with DuPont for many years, and established lines of communication with Breen soon after he became CEO at DuPont in October. They said Liveris argued that a deal would help then find synergies before spinning off into three more focused kines of business.

For their agricultural divisions, a combination between Dow and DuPont is a great fit. The two firms sell close to 17% of the world’s pesticides, and the combined company would become the third-largest global supplier of crop chemicals. Moreover, the new firm would supply close to 41% of the U.S. corn seed business and 38% of the American soybean market.

Both of the firms also have divisions that make films, coatings and other materials used in the food, pharmaceutical, auto and industrial sectors. Of interest, DuPont’s line includes Kevlar fibers and Corian countertops, while Dow’s includes Styrofoam insulation, food and beverage packaging and sunscreen chemicals.

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