Dow and DuPont to merge to create £85.5bn chemicals giant

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US chemical giants DuPont and Dow have agreed to merge in an all-stock deal valuing the combined company at $130bn (£85.8bn), with plans to eventually split into three.

The transaction, which is likely to face intense regulatory scrutiny, allows the new company – to be called DowDuPont – to rejig its assets, get rid of any overlap and eventually reap billions of dollars worth of cost savings, in part by slashing thousands of jobs.

Dow and DuPont have been struggling to cope with falling demand for farm chemicals due to declining commodity prices and a strong dollar, even as their plastics businesses have thrived thanks to low natural gas prices.

The planned split would create three independent "powerhouse" publicly traded companies focused on agriculture, materials and specialty products.

Dow and DuPont shareholders will each own about 50pc of the newly combined business.

DuPont chief executive Ed Breen will be CEO of the new company, while Dow Chemical boss Andrew Liveris will be executive chairman.

"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," Mr Liveris said.

Mr Breen, who is chairman and chief executive of DuPont, called the merger a "definitive leap forward".

"This merger will create significant near-term value through substantial cost savings. Longer term, the three-way split we intend to pursue is expected to unlock even greater value for shareholders and customers and more opportunity for employees," he said.

Dow Chemical shareholders will get one DowDuPont share for each Dow Chemical share they hold, while DuPont shareholders will get 1.282 shares in DowDuPont for each DuPont share they own.

The transaction, which is expected to complete in the second half of 2016, should deliver cost savings worth about $3bn in the first two years, with the possibility of saving another $1bn.

Mr Breen said that these cost savings could be achieved by the time the combined company splits and that it would create a "very tax efficient structure".

But this merger-cum-restructuring deal will inevitably lead to job losses at both DuPont and Dow.

While Mr Breen wouldn't give a precise figure, he confirmed "there will be headcuts", but added that the scale of the redundancies might "not be as big as you might extrapolate" as a lot of the cost savings will be found in other areas that don't involve manpower.

Mr Liveris said Dow's headcount would be reduced among its back office staff, but insisted that both companies were "very careful not to go deep at all on the R&D side" because they didn't want to put growth at risk.

"The only place where there will be a reduction in R&D will be where there is duplication," he said.

In conjunction with the merger, both companies are taking separate steps to restructure their respective businesses.

DuPont is hoping to take $700m of costs out of the business, partly by shrinking its 63,000-strong workforce by 10pc.

Dow, meanwhile, which employs about 53,000 staff, said it was taking full ownership of Dow Corning, currently a 50-50 joint venture between Dow and Corning. The move is expected to generate more than $1bn in additional profit and will help Dow expand the range of products it offers in building and construction, consumer care, and automotive markets.

Since taking the helm at Dow in 2004, Mr Liveris has been reshaping the company through divestitures, including selling the chlorine business on which the company was founded 118 years ago.

“Over the last decade our entire industry has experienced tectonic shifts as an evolving world presented complex challenges and opportunities," he said.

"This merger of equals significantly enhances the growth profile for both companies. The transaction is a major accelerator in Dow’s ongoing transformation."

He also revealed that Dow had been courting DuPont since 2006 as the board realised a decade ago that Dow “was not going anywhere” because its commodity divisions, such as plastics, were competing against companies that were state owned and subsidised

"So we were looking for an innovation partner,” he told Bloomberg. “We knew we needed to build an innovation engine to deserve that partner. The first go-around didn’t work because we were not the company we became.”

When the combined company is cut into three, the newly created agriculture business is forecast to generate $19bn in sales a year, while material sciences will have a turnover of $51bn and specialty products $13bn. They will be spun off 18 to 24 months after the merger is completed.

Asked if they had spoken to US competition regulators, Mr Breen and Mr Liveris said they had not, but that their legal teams had been "combing" through the deal and that there was little overlap between the two businesses.

"As big as our two companies are and while we sell into the same end markets, overlap is very de minimis," said Mr Breen. "We don’t have a concern.

"One of the beauties of putting the two agri businesses together is that there is going to be more consolidation in this space and we have first mover advantage and will now be one of the big leading players."

DuPont shares were down about 6pc at $70.40 as markets opened in New York on Friday, while Dow shares fell 2pc to hover around the $53.70 mark.