The Merger of Dow Chemical and DuPont: A Pharma Industry View

Just weeks after Pfizer and Allergan announced a $160 billion mega merger, the supply side is bracing for its mega deal: the proposed $120 billion merger of Dow Chemical and DuPont.? DCAT Value Chain Insights (VCI) takes an inside look.

A combined Dow Chemical and DuPont would generate pro forma sales of approximately $83 billion, placing it as the number one chemical company in the world ahead of the current number one global chemical company, BASF. The plan, however, is to break the company into three separate standalone companies, one specializing in agricultural chemicals, a second in plastics and other materials, and a third in specialty products, which would include electronics, nutrition, and health. DCAT Value Chain Insights (VCI) examines the implications for the pharmaceutical manufacturing value chain.

Examining the deal 
Under the deal, announced last week, the boards of directors of Dow Chemical and DuPont unanimously approved a definitive agreement under which the companies will combine in an all-stock merger of equals. The combined company will be named DowDuPont. The parties intend to subsequently pursue a separation of DowDuPont into three independent, publicly traded companies through tax-free spin-offs. This would occur as soon as feasible, which is expected to be 18-24 months following the closing of the merger, subject to regulatory and board approval. The transaction is expected to deliver approximately $3 billion in cost synergies, with 100% of the run-rate cost synergies achieved within the first 24 months following the closing of the transaction. Additional upside of approximately $1 billion is expected from growth synergies.

These companies will include a global pure-play agriculture company, global pure-play material science company, and a specialty products company. Upon closing of the transaction, DowDuPont will have a combined market capitalization of approximately $130 billion. 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, on a fully diluted basis, excluding preferred shares.

“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,” said Andrew N. Liveris, Dow’s chairman and chief executive officer, in a company statement “Over the last decade, our entire industry has experienced tectonic shifts as an evolving world presented complex challenges and opportunitie, requiring each company to exercise foresight, agility and focus on execution. This transaction is a major accelerator in Dow’s ongoing transformation, and through this we are creating significant value and three powerful new companies. This merger of equals significantly enhances the growth profile for both companies, while driving value for all of our shareholders and our customers.”

“This is an extraordinary opportunity to deliver long-term, sustainable shareholder value through the combination of two highly complementary global leaders and the creation of three strong, focused, industry-leading businesses. 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,” said Edward D. Breen, chairman and chief executive officer of DuPont, in a company statement “For DuPont, this is a definitive leap forward on our path to higher growth and higher value. 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 for shareholders and customers and more opportunity for employees as each business will be a leader in attractive segments where global challenges are driving demand for these businesses’ distinctive offerings.”

Upon completion of the transaction, Liveris will become executive chairman of the newly formed DowDuPont board of directors and Breen will become CEO of DowDuPont. In these roles, both Liveris and Breen will report to the board of directors. In addition, when named, the chief financial officer will report to Breen. DowDuPont’s board is expected to have 16 directors, consisting of eight current DuPont directors and eight current Dow directors. The full list of directors will be announced prior to or in conjunction with the closing of the merger. The committees of each company will appoint the leaders of the three new standalone companies prior to a contemplated spin-off.

Following the closing of the transaction, DowDuPont will be dual headquartered in Midland, Michigan and Wilmington, Delaware, respectively the current headquarters of Dow and DuPont. The merger transaction is expected to close in the second half of 2016, subject to customary closing conditions, including regulatory approvals, and approval by both Dow and DuPont shareholders. The subsequent separation of DowDuPont, which the companies intend to pursue, would be expected to occur 18-24 months following the closing of the merger.

A look inside the new DowDuPont 
It is the intention of both companies’ boards of directors that, following the merger, DowDuPont would pursue a tax-free separation into three independent, publicly traded companies with each targeting an investment-grade credit rating. The agricultural company would unite DuPont’s and Dow’s seed and crop protection businesses and have combined pro forma 2014 revenue of approximately $19 billion (approximately $11 billion from DuPont and $7 billion from Dow Chemical). The material science company would consist of DuPont’s Performance Materials segment, as well as Dow’s Performance Plastics, Performance Materials and Chemicals, Infrastructure Solutions, and Consumer Solutions (excluding the Dow Electronic Materials business) operating segments and have combined pro forma 2014 revenue of approximately $51 billion (approximately $45 billion from Dow and $6 billion from DuPont). The specialty products company: will include DuPont’s Nutrition & Health, Industrial Biosciences, Safety & Protection and Electronics & Communications, as well as the Dow Electronic Materials business and have combined pro forma 2014 revenue for specialty products of approximately $13 billion (approximately $11 billion from DuPont and $2 billion from Dow Chemical).

Advisory Committees will be established for each of the businesses. DuPont’s Chairman and CEO Edward D. Breen will lead the Agriculture and Specialty Products Committees, and Dow Chairman and CEO Andrew Liveris will lead the Material Science Committee. These Committees will oversee the respective businesses and will work with Liveris and Breen on the intended separation of the businesses into independent, standalone entities.

The projected cost synergies of each of the new companies is as follows: the agricultural company, $300 million; the material science company, $1.5 billion; and the specialty products company, $1.3 billion. The combined cost synergies of $3 billion for all three companies would be distributed as follows: cost of goods sold (approximately 40%), selling, general, and administrative expenses (approximately 30%), and research and development (R&D) (approximately 10%). To achieve these cost synergies in the agricultural company, the focus will be to: drive seed production and go-to-market cost efficiencies; eliminate duplicative R&D programs, including breeding, traits, and chemical discovery; and enhance supply chain and global site optimization. In the material science company, the focus will be on to: optimize the global footprint across manufacturing, sales, and R&D facilities, capture feedstock and hydrocarbons synergies; and enhance operational excellence in production cost efficiencies. In the specialty products company, the focus to achieve these cost synergies will be to: (1) leverage R&D spend (programs, resources, sites) in the electronics space; (2) optimize manufacturing in the electronics space; (3) leverage raw materials buy in key market segments. In addition, all three companies will seek corporate synergies by reducing corporate and leveraged services costs and realizing procurement synergies. The $3 billion in cost synergies is in addition to the previously announced combined stand-alone cost reduction programs of Dow and DuPont, which included a plan by DuPont to realize $700 million in cost savings to be realized in 2016, and Dow Chemical’s three-year, $1 billion productivity plan (2015-2017), which includes $300 million to be realized in 2016 (prior to expected transaction close).

For a pharmaceutical industry perspective, the nutrition and health segment of the to-be-formed specialty products company from the combined Dow and DuPont would be a piece that would have specific supply into the pharmaceutical industry. The nutrition and health segment, which includes excipients, would have an overall revenue base of approximately $4 billion in the combined company. Currently, Dow’s excipients business is part of Dow Pharma & Food Solutions, part of Dow Consumer Care. Dow Pharma & Food Solutions now provides a single interface to Dow technologies and products for the pharmaceutical and food manufacturing markets. It includes excipients, active pharmaceutical ingredients, and functional food ingredients. Dow Pharma & Food Solutions employs 1,200 people globally across nine sites and 15 manufacturing plants. Medical packaging, including pharmaceutical packaging, would be part of the new material science company to be spun off from the combined Dow and DuPont. 

With the proposed deal, Dow Chemical is also restructuring its ownership in Dow Corning, now a 50:50 joint venture with Dow Chemical and Dow Corning, to have Dow Chemical take 100% ownership. With Dow and Dow Corning coming together, Dow will extend its participation in Consumer Solutions and Infrastructure Solutions segments. The transaction is subject to customary closing and regulatory approvals.

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