Stories overnight (on WSJ, Bloomberg, CNBC) that DuPont and Dow are going to announce a mega merger this week...both names are around $60bn market cap and both have activist shareholders. The stories indicate that DuPont and Dow are planning to merge then break-up into three separate companies (we would estimate that these could be an agri-related company, a specialties company and then a commodities company. We note that this deal would follow the recent Solvay/Cytec and AL/Airgas deals, both of which have been announced in the past few months. We see a global M&A bonanza underway in the chemicals industry with US consolidation (European companies involved) driven by a combination of shareholder activism, strong European B/S and low interest rates. We would refer investors to our note published Dec 2, 2015 Sector outlook 2016: Navigating the M&A bonanza for more details on this theme.
A Dow/DD merger would have three implications for the European names 1) For Syngenta a Dow/DD tie-up is a good thing as some investors feared Syngenta might actually try and buy the DuPont ag business. This merge would put pressure on Monsanto so to us the most likely outcome is now a revised offer from Monsanto for Syngenta. 2) For the large European names this is now time to be looking at big US deals as the US chemicals industry is heavily up for sale due to the pressure from activists. BASF would be well placed to buy assets from a Dow/DuPont tie-up as could other names (e.g Evonik). Our analysis in the sector suggests that share prices of acquiring companies tend to go up post acquisition announcements (not down) for the 180 day period following announcements. 3) In gases we see incremental pressure on Air Products and remain of the view that a break-up of this name could occur mid-term with Linde the most logical name to be involved. 4) In Europe the attention will inevitably turn to who could be taken-out now M&A is firmly back on the agenda and aside from Syngenta we would flag JMAT, Symrise, Clariant and Croda as the more vulnerable names in this space.