Breaking up is harder to do as DowDuPont eyes larger Specialty Products division

The planned break-up of the newly minted DowDuPont into at least three entities will become more complex as businesses with around $8bn in sales will be transferred from its Materials Science division to its Specialty Products division, following a comprehensive portfolio review by consultancy McKinsey.

The company is essentially betting that the growth potential of the businesses resulting from their transfer to Specialty Products will far outweigh the dis-synergies from lack of raw material integration.

DowDuPont
DowDupont’s ed Breen (left) and andrew Liveris are committed to executing the separation plan

“We have a once-in-a-lifetime opportunity to reconfigure 300 years of corporate history to market driven, technology based, and low-cost integration. The markets spoke, and we responded. No one’s done it to this magnitude,” said chairman Andrew Liveris on a special conference call. Management is committed to its previous targets of $3bn in cost synergies and $1bn in growth synergies.

The businesses being transferred to Specialty Products are Dow’s Automotive Systems’ adhesives and fluids platforms; Dow’s Building Solutions business (Styrofoam, extruded polystyrene); Dow’s Water and Process Solutions business (reverse osmosis filters and ion exchange resins); Dow’s Pharma and Food Solutions business (cellulosics); Dow’s Microbial Control business; DuPont’s Performance Polymers business; and several silicones-based businesses aligned with applications in industrial LED, semiconductors, medical, as well as Molykote brand lubricants for automotive and industrial equipment and Multibase, which provides solutions for the thermoplastic compounding industry. The businesses being transferred are projected to generate earnings before interest, tax, depreciation and amortisation (EBITDA) of about $2.4bn in 2017, including around 40% of the “heritage” Dow Corning EBITDA.

Dow aims to separate the Material Science division first, in the next 12 months, followed by Specialty Products and Agriculture within 18 months.

The Specialty Products division, referred to as “Hodgepodge Co” by one analyst, will have around $21bn in sales (based on 2016 figures) and an operating EBITDA margin of about 25%. Its four segments will be equally weighted in terms of sales between Electronics and Imaging ($5bn), Transportation and Advanced Polymers ($5bn), Safety and Construction ($5bn), and Nutrition and Biosciences ($6bn).

SCALE AND OPTIONALITY

DowDuPont CEO Ed Breen is excited about the potential for the four divisions. In the building and construction market, the product line comprising “Dow’s adhesives, caulks, sealants and Styrofoam, and Tyvek (building wrap) and Corian (countertops) on the DuPont side is going to be unmatched in the breadth and scale we’ll have with customers,” said Breen.

The fact that each of the four Specialty Products segments has leading market positions allows for further separation down the line.

“Each are pretty much market leaders as they sit now. We have all kinds of optionality down the road to do what we want,” said Breen.

“We still harbour a deep suspicion that Specialty Products will ultimately be separated further. Regardless, the combination of these preeminent franchises is a positive in our view, and the sum-of-the-parts just became a bit more compelling,” said Frank Mitsch, analyst with Wells Fargo.

Investors signaled their approval, sending shares of DowDuPont up 2.5% on 12 September.

ACTIVIST INVESTOR PLAN

Activist investor Third Point, led by Dan Loeb, in May 2017 offered its plan for the comprehensive portfolio review. It got a good deal of, yet not exactly what it wanted.

“The activists were able to essentially get two-thirds of their proposed portfolio with $2.4bn of EBITDA being transferred from Materials Science to Specialty Products versus the $3.4bn it had hoped for in its May 2017 White Paper,” noted Wells Fargo’s Mitsch.

Third Point also noted that the four business segments of Specialty Products it proposed (which was slightly different from the new plan) could stand alone as focused public companies, creating additional shareholder value. Wall Street analysts are modeling higher valuation multiples for the specialty businesses that are clearly separated from the Materials Science unit.

“We believe that SpecialtyCo will carry a higher valuation multiple than new Dow (Materials Science), so that the shift should allow investors to ascribe a higher valuation to the company,” said UBS analyst John Roberts.

“SpecialtyCo adds a new segment – Transportation and Advanced Polymers – anchored by legacy DuPont nylon (engineered resins). What comes around, goes around, as DuPont once had an automotive segment. The other three SpecialtyCo segments are also anchored by legacy DuPont segments, so it looks somewhat like old DuPont (less Ag, Axalta and Chemours),” said Roberts.

“Regarding concerns that the ‘band is getting back together’, we note that SpecialtyCo will have corporate overhead less than 1% of sales, so the new segments could be easily separated,” he added.

MATERIAL SCIENCES

The revised Material Sciences division will have sales of around $40bn (based on 2016 figures) with an operating EBITDA margin of over 20%. It includes cracker operations, plus polyolefins, elastomers, polyurethanes, silicones, acrylics, ethylene oxide (EO) derivatives, propylene oxide (PO) derivatives and cellulosics.

OPTIONS ON TABLE

While DowDuPont’s plan is to create three separate companies – Material Science, Specialty Products and Agriculture, management is keeping the option of further separation of the Specialty Products business on the table.

In the meantime, management will work on how to shift 
functions and manufacturing assets, and what types of arrangements to make at the 50 or so sites that involve both Material Science and Specialty Products 
operations.

The scale and complexity of the DowDuPont breakup plan into three, or even up to seven separate companies is unprecedented.It should offer plenty of opportunities for the businesses involved, as well as the overall chemical industry, as further M&A and divestitures are expected.

Additional reporting by Stefan Baumgarten