Dow Chemicals and DuPont in $130 billion megamerger, will split into three later

Chemical titans DuPont and Dow Chemical Co have agreed to combine in an all-stock merger valued at $130 billion in a first step toward breaking up into three separate businesses, 

The deal, announced on Friday, will face intense regulatory scrutiny, analysts said, especially over combining their agricultural businesses, which sell seeds and crop protection chemicals, including insecticides and pesticides.

Executives from both companies said the agrichemicals businesses have little overlap and any asset sales would likely be minor.

Potential tax savings were one reason for the complicated merger-before-breakup deal, analysts said. "They need to merge first in order for the subsequent spinoffs to qualify as tax-free transactions in the United States," said SunTrust Robinson Humphrey analyst James Sheehan.

Dow shareholders would own 52 percent of the new company after preferred shares are converted, the companies said. The agreement includes a $1.9 billion termination fee under specified circumstances, such as rejection by shareholders.

The merger, one of the biggest of the year, would allow Dow and DuPont to rejig assets based on the diverging fortunes of their businesses.

The companies have been struggling with falling demand for farm chemicals due to slumping crop prices and a strong dollar, even as their plastics businesses thrive thanks to low natural gas prices.

Activist investor Nelson Peltz of Trian Partners, who has pressed DuPont to separate its businesses, said he "fully supports" the transaction and sees the combination as "a great outcome for all shareholders."

The chemical majors felt compelled to combine due to a lack of growth opportunities, said Key Private Bank analyst Rob Plaza.

"I think the big catalyst would have been (DuPont Chief Executive Ed) Breen coming in, his track record of extracting value from companies, and the fight that DuPont had gone through with Nelson Peltz," Plaza said. "We may see more consolidation."

KEY POINTS

* The new company will be called DowDuPont. DuPont Chief Executive Officer Ed Breen will be CEO of the new company and Dow CEO Andrew Liveris would be executive chairman.

* It will have dual headquarters in Wilmington, Delaware, currently DuPont's home town, and Midland, Michigan, where Dow has its headquarters.

* DuPont shareholders will receive 1.282 shares of DowDuPont for each DuPont share and Dow shareholders will get 1.00 share of DowDuPont for each Dow share. After preferred shares are converted, Dow shareholders will own 52 percent of DowDuPont.

* The merger will generate cost savings of about $3 billion in the first two years, with $1 billion in other savings possible.

* The new board would have 16 members, with each company contributing eight directors.

* DuPont expects 2016 sales growth to be "challenging," due to economic weakness in agriculture and emerging markets. It plans to slash about 10 percent of its work force and take a pretax charge of $780 million.

* The three-way split is likely to be 18 to 24 months after the deal closes, which is expected in the second half of 2016.

* The biggest of the three new companies by revenue would be material sciences, catering to the packaging, transportation and infrastructure industries. Major competitors would beGermany's BASF, Honeywell and 3M. This company's combined 2014 revenue was about $51 billion on an adjusted basis.

* The specialty products company will sell materials to the electronics and communications industries as well as to the safety and protection sectors. The combined adjusted revenue was about $13 billion in 2014.

* The third business, selling seed and crop protection chemicals, generated adjusted revenue of about $19 billion.