DuPont and Dow in $120bn deal talks

Dow Chemical and DuPont are in talks over a potential $120bn merger that would bring together America’s two largest chemicals companies, and then split them up into three new businesses, according to a person familiar with the negotiations.

A deal between Dow and DuPont would bring together two companies of very similar size: Dow had a market capitalisation of $60bn and DuPont of $59bn at their closing share prices on Tuesday.

However, there could be significant antitrust problems raised by the deal because of the two companies’ size, and it was not certain that it would go through, the person warned.

The talks come as the global agricultural chemicals industry is in a state of upheaval. Michel Demaré, chairman of Syngenta of Switzerland, told the Financial Times last month that there were “extremely active” talks among the leading companies in the sector.

News of the Dow and DuPont talks was first reported by the Wall Street Journal on Tuesday evening.

Both companies have been under pressure from activist investors — Third Point in the case of Dow, and Trian at DuPont — to become leaner and more focused by cutting costs and spinning off non-core businesses.

Trian owns 2.94 per cent of DuPont, with 25.8m shares valued at more than $1.7bn at Tuesday’s closing price of $66.60. Third Point owns 2.03 per cent of Dow, with 23.5m shares worth almost $1.2bn at Tuesday’s closing price of $50.90 per share.

A merger of Dow and DuPont would seem to fly in the face of the activists’ strategy. However, a three-way break-up of the merged group could allow the creation of more focused businesses, concentrating on areas such as speciality chemicals or petrochemicals.

DuPont has a new chief executive, Edward Breen, who took over in November after his predecessor Ellen Kullman unexpectedly retired in October.

Andrew Liveris, chief executive of Dow, has come under pressure both from Third Point and from Reuter’s reports about allegations that he used his position to finance his lifestyle. Dow described the reporting as inaccurate.

In November last year, Third Point, led by Dan Loeb, agreed a standstill deal with Dow for 12 months, during which time it could not criticise the company or buy more shares. The agreement was part of a wider deal under which Dow appointed four new independent directors, including two nominated by Third Point. That standstill agreement will expire on Monday, freeing Mr Loeb to take action again.

One potential hurdle to a deal is the bloated market share a merged company would command in agricultural chemicals and seeds. Agriculture was DuPont’s largest division last year, with sales of $11.3bn and earnings of $2.35bn, while Dow’s equivalent business had revenues of $7.29bn and earnings before interest, tax, depreciation and amortisation of $962m.