Dow Chemical and Du Pont close in on merger

Growth prospects in the Middle East are likely to be a key element behind Dow Chemical and DuPont merger talks.

The two chemicals and agribusiness outfits are near a deal that would value the combined company at about US$120 billion, according to reports yesterday, quoting anonymous Wall Street sources familiar with the talks.

If it comes to fruition the deal would be the largest ever in the chemicals industry, although it would come as no surprise.

Both companies’ management have been under pressure for some time from so-called “activist investors” – Dan Loeb in the case of Dow and Nelson Peltz for DuPont – who have pressured them to break up into their component parts to increase overall value to shareholders.

Any merger is likely be followed by a division of the company into three separate entities, one focused on agribusiness (including the nutrition units), a speciality chemicals company and one focused on bulk chemicals, according to a report by analysts at Sanford C Bernstein, a Wall Street stockbroker.

The industry has been under pressure to consolidate even before the slide in oil and commodities prices and the slowdown in world economic growth.

Ellen Kullman, DuPont’s former chief executive, began to break up her company with the spin-off of Chemours, its titanium oxide producer, in the summer. Chemours promptly laid off about 7 per cent of its workforce and contractors and cut $350 million from costs, but Ms Kullman was replaced in October by Edward Breen as she was not seen as acting fast enough on promises to improve financial performance.

Analysts estimated that a Dow DuPont tie-up would be able to cut about $3bn from its costs.

Neither company would comment on the reports, although Willem Buitelaar, DuPont’s spokesman for Europe, Middle East and Africa (Emea), noted that the company was upfront at its third-quarter results presentation about being in talks with various companies.

In the Middle East, the tie-up would be likely to face little of the regulatory scrutiny it would in the US, Europe or China, and there is little overlap in their business.

Growth prospects in the region are among the best in the world, with petrochemical experiencing 10 per cent expansion in the past decade, second only to China’s 13 per cent.

Petrochemical production capacity rose from 53.4 million tonnes in 2004, to 136.2 million tonnes last year, according to the latest industry figures from the Gulf Petrochemicals and Chemicals Association (GPCA).

Dow has bet big in the Gulf with its huge $20bn Sadara petrochemicals plant in Jubail Industrial City II, on the Red Sea coast of Saudi Arabia’s Eastern Province. The joint venture with Saudi Aramco is the largest-ever single-construction petrochemicals complex, and one of two key strategic planks for the company worldwide.

The other is a similarly large new plant on the Gulf coast of the US.

Dow announced last week that it had begun ramping up early at Sadara and is expected to reach full production next year.

Key to the economics of the plant is the low-cost feedstock (a combination of petroleum product and gas) supplied by Saudi Aramco.

“The slower demand in growth markets such as China, combined with rising competition from non-conventional producers, means that we are heading towards more competitive environment in global markets,” said Abdulwahab Al Sadoun, secretary general, GPCA. “Therefore, maximising operations to improve shareholder returns on investment is crucial for maintaining our competitive advantage,” he said, adding that growth in the Gulf has been “largely due to the availability of favourably priced gas, a key raw material in the production of chemical products.”

Dow earlier this year announced that it would expand substantially its operations at the Jebel Ali Free Zone and the port in a deal with DP World. The tenfold increase in capacity will be to accommodate new trading from the Sadara plant as well as other products, according to Moosa Al Moosa, Dow Chemical’s UAE head and regional finance chief.

A Dow-DuPont deal would increase that product slate – especially in polymers.

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Anthony McAuley

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