INSIGHT: Breaking up is harder to do as DowDuPont shifts to larger Spec Co

By Joseph Chang

NEW YORK (ICIS)–The planned break-up of the newly minted DowDuPont into at least three entities will become somewhat 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 undertaken by consultancy McKinsey.

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

“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.

“We’re going to work on the dis-synergies – to mitigate them. The upside on growth versus any little downside on cost dis-synergies is what we’ve committed to get right,” he added.

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 estimated to generate earnings before interest, tax, depreciation and amortisation (EBITDA) of about $2.4bn, including around 40% of the heritage Dow Corning EBITDA.

Source: DowDuPont

Dow will work on separating the Material Science division first, in the next 12 months, followed by the Specialty Products and Agriculture divisions within the next 18 months.

The Specialty Products division, referred to as “Hodgepodge Co” by one analyst on the call, will have around $21bn in sales (based on 2016 figures) and an operating EBITDA margin of about 25%.

Its four segments will be rather 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).

GREATER SCALE FOR SPECIALTY CO

DowDuPont CEO Ed Breen is excited about the four “well-defined divisions where the vertical end markets fit well and where the breadth of products for these end markets expands with the transfer”.

For example, 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.

And Breen also sees synergies between Dow’s sales strength on the commercial construction side and DuPont’s focus on the residential construction market.

Breen expects to raise the EBITDA margin on the Specialty Products division beyond 25% as synergies kick in.

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

“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.

Investors signalled their initial approval on the deal, sending shares of DowDuPont up nearly 2% in afternoon trading after the portfolio plan was announced.

ACTIVIST INVESTOR PLAN

Activist investor Third Point, led by Dan Loeb, in May 2017 offered its preferred plan for the comprehensive portfolio review, proposing a transfer of certain businesses from Material Science to Specialty Products, including all the Dow Corning silicones business, to create four segments within Specialty Products.

It got a good deal, yet not exactly what it wanted – parts of some businesses it proposed in safety and protection, and Dow Corning, and all of Dow’s water business will be transferred to Specialty Products (including some that it proposed staying in Material Science such as Dow’s building and construction business, Dow’s automotive business, and Tyvek and Corian from DuPont’s safety and protection business).

Meanwhile, certain parts, such as a good portion of Dow Corning silicones, will remain in Material Science.

Third Point also pointed out 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.

Third Point said its plan would create an additional $20bn in value for DowDuPont, as the Specialty Products businesses would trade at higher multiples either together with the specialty company or as separate entities.

OPTIONS ON TABLE

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

In the meantime, management will work in the coming weeks and months 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.

DowDuPont management said it is widely familiar with these host and tenant environments around the world and is confident it can execute a solid plan.

The scale and complexity of the DowDuPont breakup plan into three or even more is unprecedented.

It should offer plenty of opportunities for the businesses involved, as well as the overall chemical industry, as further mergers and acquisitions (M&A) and divestitures can be expected to take place in the years ahead as a result of this historic combination.

Additional reporting by Stefan Baumgarten

Image above shows DowDuPont Chairman Andrew Liveris.