Tender your shares of the two giant manufacturing companies stocks, Dow Chemical and DuPont, for shares of the merged DowDuPont when the time comes. Then buy DowDuPont as it achieves $4 billion of ‘synergies’. After that, DowDuPont will spin off into three strong publicly-traded companies.
We regularly review commodity chemicals manufacturing stocks Michigan-based Dow Chemical (NYSE─DOW) and Delaware-based DuPont (NYSE─DD). Since we published our February 18 issue, Dow Chemical’s and DuPont’s shares have advanced by 13.4 per cent and 14.3 per cent, respectively. That’s because their merger-of-equals should significantly benefit the shareholders of both companies. So should the subsequent spin off of the merged company into three new publicly-traded businesses.
When the time comes, tender your Dow Chemical shares for shares in DowDuPont on a one-for-one basis. Tender your DuPont shares for 1.282 shares of DowDuPont. Otherwise buy shares in DowDuPont when the merger closes. This is expected to occur in the second half of 2016.
DowDuPont expects to realize “cost synergies” of $3 billion. It anticipates achieving this within 24 months of the closing of the merger. The company expects this to add about $30 billion to the market value of its shares. DowDuPont also expects to achieve “growth synergies” of $1 billion.
DowDuPont will become three companies
In 18 to 24 months after the merger closes, DowDuPont will spin off into three new businesses. This includes a global pure-play Agriculture company; a global pure-play Material Science company; and a “technology and innovation-driven” Specialty Products company.
Separate ‘pure-play’ stocks often fetch a higher price than they would as a larger, diversified conglomerate stock. That’s partly thanks to the elimination of what’s known as the ‘conglomerate discount’. In addition, each company can focus on its own business and fund investment without having to answer to a higher level of management.
DuPont chairman and chief executive officer Edward Breen said: “This merger of equals will create significant near-term value through substantial cost synergies and additional upside from growth synergies. Longer term, the three-way split we intend to pursue is expected to unlock even greater value to shareholders.”
The Agriculture company would come from the combination of Dow Chemical’s and DuPont’s seed and crop protection businesses. Their complementary products aim to assist farmers in much of the world with a “broad portfolio” of products and services. Had the Agriculture company existed in 2014, it would’ve generated revenue of $19 billion. (The companies don’t provide numbers for 2015).
The Material Science company will combine DuPont’s Performance Materials business with Dow Chemical’s Performance Plastics, Performance Materials, Chemicals, Infrastructure Solutions and Consumer Solutions businesses. “The combination of complementary capabilities will create a low-cost innovation-driven leader.” This company would’ve produced revenue of $51 billion in 2014.
The Specialty Products company will include DuPont’s Nutrition & Health, Industrial Bio-sciences, Safety & Protection and Electronics & Communications businesses with Dow Chemical’s Electronics Materials business. This will “create a new global leader in Electronics Products.” The company would’ve generated revenue of $13 billion in 2014.
Mr. Breen said, “Each of these businesses will be able to allocate capital more effectively, apply its powerful innovation more productively, and extend its value-added products and solutions to more customers worldwide.”
We expect the merger to succeed. That’s because the boards of directors of both Dow Chemical and DuPont unanimously approved a definitive agreement. On June 20, the shareholders of both chemical manufacturing companies also voted in favour of the transaction.
The Investment Reporter, MPL Communications Inc.
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