Dow and DuPont to combine in $130-billion merger of equals (update)

13:35 PM | December 11, 2015 | Robert Westervelt

Liveris Breen
DowDupont Done Deal: DuPont CEO Ed Breen (l.)
and Dow Chemical CEO Andrew Liveris

Dow Chemical and DuPont have announced plans to combine in an all-stock merger of equals valued at more than $130 billion. The combined company will be named DowDuPont and be dual headquartered in Midland, MI; and Wilmington, DE. Separately, Dow announced Friday that it will become the 100% owner of Dow Corning, which is currently a 50-50 joint venture with Corning. Dow and Corning will maintain their current equity stake in Hemlock Semiconductor Group, Dow says.

The companies intend to subsequently separate DowDuPont into three independent, publicly traded companies through tax-free spin-offs. This would occur as soon as possible, which is expected to be 18–24 months following closing, subject to regulatory and board approvals.

“This transaction is a game-changer for our industry and reflects the culmination of a vision we have had for more than a decade to bring together these two powerful innovation and material science leaders,” says Andrew Liveris, Dow’s chairman and chief executive officer.

Under the terms of the transaction, Dow shareholders will receive a fixed exchange ratio of 1.00 share of DowDuPont for each Dow share, and DuPont shareholders will receive a fixed exchange ratio of 1.282 shares in DowDuPont for each DuPont share. Dow and DuPont shareholders will each own approximately 50% of the combined company excluding preferred shares. The companies had a combined market capitalization of approximately $130 billion at the announcement.

Upon the completion of the DowDuPont transaction, Dow chairman and CEO Andrew Liveris will become executive chairman of the DowDuPont board, and Ed Breen, chair and CEO of DuPont, will become CEO of DowDuPont. In these roles, both Liveris and Breen will report to the board.

The spin-offs will include the leading global pure-play agriculture company, with revenue of $18 billion based on 2014 sales. The largest business will be a material science company with sales $51 billion, made up of Dow’s current franchise excluding ag and electronic materials plus DuPont’s performance materials business, including engineering plastics and elastomers.

The specialty products company, with revenues of $12 billion, includes DuPont’s electronic and communications, nutrition and health, industrial biosciences, and safety protection business plus Dow’s electronic materials business.

Advisory committees will be established for each of the businesses. Breen will lead the agriculture and specialty products committees, and Liveris will lead the material science committee.

DowDuPont’s board is expected to have 16 directors, consisting of 8 current DuPont directors and 8 current Dow directors. The full list of directors will be announced prior to or in conjunction with the merger's close. The committees of each company will appoint the leaders of the three new standalone companies prior to a contemplated spin-off.The transaction is expected to deliver approximately $3 billion in cost savings within the 24 months following the closing of the transaction. An additional benefit of approximately $1 billion is expected from growth synergies.

Trian Partners (New York), an activist hedge fund with a stake in DuPont, assisted in developing the deal. "We were approached by DuPont and Dow to sign confidentiality agreements and to assist in negotiations, including structure and governance. We salute both companies for their hard work in bringing this compelling transaction to fruition," Trian said in a statement.

While Trian challenged DuPont in a proxy battle this spring, and lost, current DuPont CEO Edward Breen first joined DuPont's board in attempted compromise between DuPont and Trian. Breen became DuPont's CEO in October, replacing Ellen Kullman.

Third Point (New York), another activist hedge fund which had challenged Dow in 2014, did not have any comment on the deal. Dow and Third Point signed a one-year standstill agreement last November, and Dow agreed to place two Third Point nominees onto the company's board. The standstill agreement is expected to expire on Sunday, 13 December. Third Point had proposed that Dow spin-off its petrochemicals business prior to the agreement.

The deal has "strong industrial logic" and is a "great outcome for all shareholders," Trian added in its statement. Indeed, the eventual split-up of DuPont bears some resemblance to what Trian had advocated for earlier this year. In January, Trian proposed that DuPont split into a "GrowthCo," consisting of ag, nutrition, and industrial bioscience; and a "CyclicalCo/CashCo," consisting of performance materials, safety and protection, and electronics and communications. "DuPont's conglomerate structure is destroying value," Trian said at the time.

Both Third Point and Trian retain stakes in Dow and DuPont, respectively. Third Point is currently Dow's seventh-largest shareholder, with a 2.17% stake valued at about $996 million, according to Thomson Reuters (New York) data. Trian is DuPont's fifth-largest shareholder, with a 2.94% stake valued at about $1.24 billion.