DowDuPont amends split plan

Less than a week after it was formed, DowDuPont is making deep revisions to its plan to split into three separate companies within the next year and a half.

Businesses that had previously been earmarked for the future Midland, Mich.-based materials science firm will now go to the specialty products firm, to be based in Wilmington, Del. The businesses being shifted together generate more than $8 billion in annual sales and a healthy $2.4 billion in pretax earnings.

The future agricultural chemical and seeds firm is untouched by the change.

The overhaul of the planned division of DowDuPont into three firms follows criticism of the split by activist investors, notably Daniel S. Loeb of Third Point. Dow and DuPont responded by launching their own review of the plan. The firms hired McKinsey & Co. and consulted with more than 25 institutional investors.

“This was a comprehensive process by every measure,” DowDuPont’s executive chair, Andrew N. Liveris, declared to analysts in a conference call last week.

Third Point appears to be satisfied. “We were pleased to be part of a dialogue that created such a positive outcome for all of DowDuPont’s shareholders,” the firm said.

A key feature of the revamp is the decision to move from materials science to specialty products a chunk of Dow Corning representing about 40% of the silicones maker’s profits. The businesses being moved are related to electronics, automotive lubricants, and thermoplastic compounding.

DuPont’s performance polymers business, which makes engineering polymers such as nylon and polyacetal, as well as Dow’s automotive adhesives and fluids businesses, will also go to specialty products. They will be housed together in a business oriented toward the auto industry.

Dow’s water and process solutions unit, a supplier of ion-exchange resins and reverse osmosis membranes, and Dow’s building solutions business, which includes its Styrofoam insulation board, are also going to specialty products.

Specialty products will receive Dow cellulosic businesses related to food and pharmaceuticals. They will pair with food-related businesses the specialties company was already slated to have. The Wilmington-based firm will also get Dow’s microbial control unit.

Laurence Alexander, an analyst with the investment firm Jefferies, said the update to the split is sweeping. “The realignment was more significant than we had expected, as DowDuPont has opted to split Dow Corning and move some automotive adhesives and films to specialty products,” he wrote in a note to clients.

Morgan Stanley stock analyst Vincent Andrews sees potential financial benefits from the shift. Investors are likely to give the materials science company a lower multiple—the ratio of stock price to annual earnings—than the faster growing specialty products firm. Likewise, investors in the large materials science firm might not appreciate businesses with attractive expansion prospects. Moving them to specialty products ensures “they receive a valuation commensurate with their specialty nature,” Andrews told clients.

After the split, the materials science firm will have about $40 billion in annual sales from petrochemicals, polyolefins, elastomers, acrylics, cellulosics, silicones, polyurethanes, and ethylene and propylene oxide derivatives.

Specialty products will have about $21 billion in sales. It will house four roughly equally sized divisions: electronics, safety and construction, transportation and polymers, and nutrition and biosciences.

One analyst asked during the conference call if these divisions could eventually stand on their own as independent firms. DowDuPont CEO Ed Breen kept the door open. “We have all kinds of optionality down the road to do what we want,” he said.

Morgan Stanley’s Andrews said those words, taken with the portfolio shift, “should provide investors confidence that the DowDuPont board is focused on using this unique merger transaction to maximize shareholder value.”