MORE ON THE DOW CHEMICAL, DUPONT DISCUSSIONS
Dec. 10, 2015
Dow Jones reports:
Shortly after Edward Breen stepped in to run DuPont Co. in October, Andrew Liveris, longtime head of Dow Chemical Co., called with a proposal.
Mr. Liveris saw an opportunity to strike the merger he had long wanted, marrying the two giants of American industry with a combined market capitalization of more than $130 billion, and he was eager to talk to the noted deal maker now leading his rival.
Mr. Breen asked for some time. He later joked with bankers that he hadn't even had a chance to find the bathrooms at DuPont when Mr. Liveris came calling, according to people familiar with the matter.
Nine weeks later, Dow and DuPont are on the verge of consummating a deal. The two are in advanced talks on a merger that would reshape the chemical and agricultural industries by creating a new massive company, which would quickly be spun into three entities, The Wall Street Journal reported Tuesday. A deal could be announced as soon as this week.
It comes at a time of sinking commodity prices and a strengthening U.S. dollar, which have hurt revenues across the companies' business lines. Both companies have shed some of their hallmark businesses that generated lower profits and left them exposed to price swings, while focusing on proprietary products in faster-growing sectors such as food, electronics and packaging.
Dow and DuPont also have cut costs and streamlined operations, but both drew critiques from activist investors -- Nelson Peltz's Trian Fund Management LP at DuPont and Daniel Loeb's Third Point LLC at Dow -- who said executives moved too slowly and that the companies were still too big and losing ground to nimbler competitors.
By combining and then breaking up, DuPont and Dow see a way to speed the process in one fell swoop, while creating an agricultural giant and a materials maker that could each be worth more than the current stand-alone companies, according to the people familiar with the talks.
Agriculture would account for 23% of Dow and DuPont's combined revenue; performance materials and chemicals 48%; and other divisions, like nutrition and consumer products, would make up 29%. The companies in 2014 generated $93.2 billion in combined sales.
Shareholders cheered the idea on Wednesday, sending both companies' stocks up 12%, adding a combined $14 billion in market value. Dow gained $6.07 to $56.97, while DuPont gained $7.89 to $74.49 -- the largest dollar gains for each since at least 1972.
Mr. Liveris has been pushing for a deal for much of his 11-year tenure at Dow, the world's second-biggest chemical manufacturer. He has bet the Midland, Mich., company's future on material-sciences products used in industrial, automotive and construction sectors that come with high prices that are less tied to underlying commodities.
To do that, he needs to reduce Dow's exposure to agriculture sciences that make seeds and various other chemicals based on petroleum products.
DuPont, in Wilmington, Del., was facing similar pressures and looking to also boost margins and reduce the cyclical nature of its business. It started growing its agricultural businesses, sold its paints business and spun off a performance-chemicals business.
Mr. Liveris had tried to strike a deal before, attempting to buy DuPont in 2006, people familiar with the matter said. When that went nowhere, Mr. Liveris acquired specialty chemicals producer Rohm & Haas Chemicals LLC in 2009, a $16 billion deal struck just as the market for financing collapsed.
The deal nearly fell apart, and the debt burden forced Mr. Liveris to break a pledge to never cut Dow's dividend and to take a $3 billion rescue financing package from Warren Buffett.
Mr. Liveris tried repeatedly to get DuPont to come to the table, the people said. He engaged in talks with Ellen Kullman, who took over DuPont in 2009, they said, but the talks never amounted to a deal.
Ms. Kullman's tenure ended abruptly this October. She had survived a proxy fight with Trian, which had argued for a breakup of agriculture and industrial products. Ms. Kullman won a close shareholder vote in May partly by promising DuPont would hit earnings targets.
But when DuPont's earnings failed to turn around and shares fell for months after DuPont's annual meeting, Ms. Kullman announced she would retire. Mr. Breen, a noted turnaround artist who broke up Tyco International PLC and created large shareholder returns there, was named DuPont's interim chief executive.
The change set off a round of talks among those in the agricultural industry. Already St. Louis-based Monsanto Co. had sought to acquire Syngenta AG for $46 billion -- an idea the Swiss company rejected. Messrs. Breen and Liveris both publicly declared they would entertain deals.
After Mr. Breen found his bearings at DuPont, the two executives began talking about their entire companies, not just the agriculture units. Mr. Liveris presented the idea he thought would bring the most value: A merger of equals followed quickly by a breakup into an agricultural company and a materials company, the people said.
Mr. Breen quickly saw the financial possibilities but suggested a further split, with a third business for various specialty chemical products like nutrition that didn't fit with the other two, the people said.
The combined entity would allow them to rapidly cut some $3 billion in costs, and then spin out three specialized companies that have differing research-and-development needs and can attract different investors, the people said.
Breakups for those reasons have been in vogue in the U.S., as activists pressure companies to sharpen their focus. The trend has collided with a record year for mergers and acquisitions, with Pfizer Inc. and Allergan PLC announcing a similar megamerger followed by a plan to separate some assets.
Dow and DuPont believed the planned splits would alleviate concerns about antitrust regulators blocking a deal, the people said. Though the deal would create a company with high market share in several businesses, the stand-alone entities would continue to face stiff competition, the people said.
DuPont removed the interim tag from Mr. Breen's title on Nov. 9, naming him officially chairman and chief executive.
Trian blessed the move, it had told the board before the announcement, people familiar with the matter said. But it still expected to see improved results and laid out a plan for him to get there, the people said. Trian has supported the deal talks and encouraged the DuPont board to reach an agreement, people familiar with the matter said.
At the same time, Mr. Liveris and Dow were gearing up for their own activist investor to re-emerge.
In January 2014, Mr. Loeb's Third Point had taken what was then a $1.3 billion stake in the company and began calling for a split of its petrochemical products, about two-thirds of Dow's revenue, from specialty products, which includes agriculture, food, pharmaceuticals and electronics.
Mr. Loeb neared a proxy fight, launching a website and a political-ad style video lambasting Mr. Liveris for mismanagement. The sides settled quickly, with both appointing two directors to the Dow board, and an agreement that kept Mr. Loeb from speaking on Dow publicly for a year.
The activist's view on Mr. Liveris hasn't changed, and Mr. Loeb was expected to call for a management change, people familiar with the matter said. This weekend, that standstill expires.