DD DuPont de Nemours Inc

By Jacob Bunge, David Benoit and Chelsey Dulaney 

Dow Chemical Co. and DuPont Co. announced Friday that they have agreed to merge, fusing two stalwarts of American industry into a giant worth about $130 billion.

The deal would reshape the chemical and agricultural industries and comes as sinking commodity prices and a strengthening U.S. dollar have pressured revenue at both Dow and DuPont.

The companies plan to strip out about $3 billion in costs as they combine operations and ultimately break up into three separate businesses about 18 to 24 months after closing the deal. Those three resulting companies, which would be publicly traded, would be focused on agriculture, material sciences and specialty products.

The union marks a new chapter for two of the oldest U.S. companies, which had both sought to reinvent themselves as makers of more-profitable products while facing pressure from major investors agitating for the companies to make faster, bolder moves.

Dow's Chief Executive Andrew Liveris will be executive chairman of the new company, with DuPont Chief Executive Edward Breen keeping the CEO title upon consummation of a deal, which the companies billed as a merger of equals. DowDuPont will have dual headquarters in Midland, Mich., and Wilmington, Del.

The deal "was always in front of us to get done, in the right way," Mr. Liveris said in an interview. "We believe this is the right way."

DuPont shares fell 5.4% in early trading as it also announced restructuring plans and gave downbeat comments on its 2016 sales growth. Dow shares slid 2.7%. Shares in both companies had risen since The Wall Street Journal reported on Tuesday that they were in merger talks.

Friday's announcements will lead to major job cuts. DuPont said it is cutting about 10% of its global workforce in its restructuring ahead of the deal, and further reductions are likely as the combined company streamlines ahead of its planned breakup.

Under the deal's terms, shareholders of Dow Chemical will get 1 share in the new company called DowDuPont for each Dow share, while DuPont shareholders will get 1.282 shares for each DuPont share. The deal's structure will give Dow and DuPont shareholders equal stakes in the combined company, excluding the impact of preferred shares.

Mr. Breen said in an interview that DuPont's board, which he joined early last year, also had looked at the possibility of combining with its longtime rival in chemicals. He said Mr. Liveris called him on Mr. Breen's first day running DuPont in October, and pursuing a merger became easier because the companies were almost exactly the same size by market value.

"That always makes for quicker, easier negotiation," Mr. Breen said. Structuring the deal as a merger of equals will also help minimize taxes on the transaction, he said.

The companies expect the merger, which must be approved by regulators and both companies' shareholders, to be completed by the second half of 2016.

Trian Fund Management LP, which owns a major stake in DuPont and unsuccessfully pressed for board seats in a proxy fight earlier this year, said it "fully supports this transformative transaction and believes that the combination of DuPont and Dow is a great outcome for all shareholders."

The New York investment firm said it was approached by the companies to "assist in negotiations," including on structure and governance of the combined entity and the planned spinoffs.

Directors of the combined entity's board are expected to be chosen over the next four to five months, Mr. Breen said on a conference call with analysts. Dow and DuPont will likely to hire new directors to serve on advisory boards set up to help plan the three eventual spinoffs.

The companies said the breakup would occur "as soon as feasible" but that it still could take up to two years after the merger announced Friday closes, suggesting the breakup may not occur until 2018. Mr. Breen told analysts that the three-way breakup would likely be a one-off event, rather than spinning off the units at different times.

Mr. Breen and Mr. Liveris said they haven't yet determined what their roles would be when the combined DowDuPont splits into three separate companies. The companies' dividend policies would continue until the deal closes, at which point a new dividend policy will be decided, the executives said.

Mr. Liveris said there will "almost certainly" be a new leader of the materials company, which could keep the Dow name after it is spun out. "I do want to eventually go to the place where the future of the company is not just beholden to my presence," he said on the conference call.

The agriculture unit could consider an inversion deal around the time of its separation--a type of tax-saving takeover deal that moves a company's base abroad and has become popular in recent years, Mr. Breen said in response to a question on a conference call. He said there are no current plans along those lines.

There is no guarantee antitrust regulators would bless the union or that the breakup plan will address any such concerns. The merger would combine two top suppliers of industrial and agricultural chemicals and crop seeds, but it comes as sinking commodity prices and a strengthening U.S. dollar have hurt revenue across the companies' business lines.

Mr. Breen said no major divestitures were expected as the deal goes before antitrust reviewers. Dow and DuPont both will likely sell minor pieces of their businesses, "but nothing that would move the needle," Mr. Breen said.

Mr. Breen said in the interview that merging with Dow and then breaking the combined entity into three units is far preferable to a split of DuPont itself, a path proposed in late 2014 by activist investor Trian. The planned deal is "a totally different scenario," Mr. Breen said.

"We've created three leading, strategic platforms, instead of splitting DuPont into three small pieces," he said.

Should the deal come to fruition, a combination of the companies, each more than a century old, would be one of the biggest in a year marked by big deals. So far, companies have struck some $4.4 trillion of takeovers in 2015, eclipsing 2007 as the top year on record for deals, according to Dealogic.

Both Dow and DuPont have been restructuring their businesses as they've come under pressure from shareholders to slim themselves and focus on faster-growing business lines--sometimes by shedding products that made them famous.

DuPont has exited performance paints and coatings, including the business that invented Teflon nonstick pan coating. Dow, meanwhile, has gotten out of selling materials like chlorine and the epoxy used in everything from space travel to Ziploc bags.

The companies expect a combination would accelerate cost-cutting and see the deal resulting in $3 billion in cost synergies, to be fully realized within two years of the deal's closing. Dow's Mr. Liveris said the cost reductions wouldn't "hobble" the companies' research capabilities.

Ahead of the merger, Dow and DuPont said they would further reshape their businesses.

DuPont said Friday that it would cut $700 million in costs in 2016, and the company expects to book a pretax charge of $780 million related to the cuts.

DuPont said it expects sales growth next year to be "challenging" because of agricultural headwinds and the strengthening of the U.S. dollar against the Brazilian Real. DuPont will give guidance for 2016 on Jan. 27.

For its part, Dow said it would take full ownership of Dow Corning Corp., which it jointly owns with Corning Inc. Dow said it expects the move to yield more than $1 billion in annual earnings before interest, taxes, depreciation and amortization. That transaction is slated to close by the first half of 2016.

The DowDuPont deal comes shortly after DuPont named Mr. Breen, a turnaround expert, as the company's chief executive after a stint as interim CEO. Prior CEO Ellen Kullman retired after fending off Nelson Peltz and Trian, which sought board seats and criticized the company--and its leadership--for bloated corporate spending and a continued failure to hit earnings forecasts.

For its part, Dow also has had an activist investor. Last year, the company added two directors nominated by Daniel Loeb's Third Point LLC after Mr. Loeb sought a breakup of the company and threatened a proxy fight.

Talks of consolidation in the agricultural-sciences industry have heated up recently, with companies scrambling to adjust to pressure on lower prices for their commodities.

Last month, The Wall Street Journal reported that DuPont was discussing a potential combination of its agriculture division with seed giant Syngenta AG, and separately exploring a potential agriculture deal with Dow. Monsanto Co. earlier this year abandoned a $46 billion bid for Syngenta amid resistance from the Swiss company.

Write to Jacob Bunge at jacob.bunge@wsj.com, David Benoit at david.benoit@wsj.com and Chelsey Dulaney at Chelsey.Dulaney@wsj.com

(END) Dow Jones Newswires

December 11, 2015 11:24 ET (16:24 GMT)

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