One day we will look back at today and think, wow, how did we not take advantage of the weakness in the stock market and buy some Dow Chemical (DOW) or DuPont (DD) after the two chemical giants announced a huge merger deal. We will be kicking ourselves that we missed an opportunity to split the new company into three different entities that will bring out even more value once the spinouts are complete.
Now I know there is plenty wrong with this stock market right now. We have the ever-declining commodity prices, including oil, which are causing tremendous pressure on both debt and equities, as we saw this week with the disastrous 75% dividend cut by Kinder Morgan (KMI) and the shocking decision by a large mutual fund manager to bar sales of a high-yield fund because there was no liquidity to meet redemptions. We know the Federal Reserve is poised to raise rates into an environment where pretty much every industry I follow is weaker than it was six months ago. We know the rest of the world is slowing.
All of these factors make it so the stock market's doing quite poorly now, and I have become much less bullish about stocks, as I have said I would always have to be once the rate hikes begin.
Or to put it another way, this was a real bad day to announce the merger of Dow and DuPont into a $130 billion chemical titan. I know what people are thinking: Who wants a worldwide chemical company going into a Fed tightening cycle and a worldwide slowdown?
And I totally get that, if I didn't have so much faith behind the people doing the deal. First, Andrew Liveris, the CEO of Dow Chemical, has been working like a dog to get his company out of commodity chemicals where the prices are subject to the whims of the world's economies and Dow can provide no real value added. Meanwhile, he's cut out a huge amount of waste, lowered the cost of the raw feedstock needed for plastic while buying back a huge amount of stock and offering a bountiful dividend.
The actions Dow has taken this year have allowed its stock to rally 18% going into today's session, a pretty darned good return given the environment.
DuPont, too, has a CEO whom we have watched for some time and applauded for his insistence on endless value creation. Ed Breen was recently appointed CEO after Ellen Kullman left the company and he was immediately open to doing a deal that would bring out more value than Kullman was willing to do, even if it meant sacrificing DuPont's autonomy and rich history of success. We've liked Breen because we believe in breaking up companies to bring out value, and he unlocked more value when he broke up Tyco a few years ago than just about any CEO we have ever come across.
DuPont under Kullman had spurned suggestions by Trian Partners, run by huge shareholder Nelson Peltz, to do something just like this deal. But Breen was all ears to Peltz's plans, and when Liveris called he was immediately inclined to do this deal even as he had just become full-time CEO the very month the talks began.
So what makes me like this deal, which should close in the second half of 2016? I like the three different companies that Liveris and Breen intend to create: agricultural chemicals, material sciences and specialty products. As we told subscribers to Action Alerts PLUS, the service that accompanies actions in my charitable trust, each of these businesses will be a leader in its respective industry. The $19 billion agricultural company offers among the most comprehensive and diverse portfolios in the industry, reaching a broad range of end markets. Management specifically pointed out that the seeds and crop protection businesses would be unparalleled, basically saying the marketplace should like this company a heck of a lot more than the current industry leader, Monsanto (MON).
Remember, I always tell you that the market likes a pure play, and before this deal Dow was being pulled down by this ag business. Together with DuPont's business, though, you have a one-stop agricultural powerhouse that, when commodities regain their strength, will be the stock money managers will lust to own.
The $50 billion material sciences business combines technology offerings that can provide innovative solutions for customers in the packaging, construction and durable-goods markets. Dow's performance plastics, materials and infrastructure businesses will dovetail perfectly with DuPont's in the same area.
Finally, the specialty products -- Dow's electronics materials and DuPont's industrial biosciences, nutritional and health and safety offerings -- will give you a company that looks a lot like the fabulously performing 3M (MMM). People love 3M, including me, it's owned by the trust. I am naturally drawn to this company, too, and it's still just on the drawing board. (Dow Chemical and 3M are part of TheStreet's Action Alerts PLUS portfolio.)
The new company, DowDuPont, intends to unlock $30 billion of market value with the establishment of these three new companies, and I wouldn't doubt it given both CEOs' records for creating wealth for shareholders and Breen's tactics in particular for developing value in the Tyco break-up.
It's not enough just to shuffle the deck of two companies. Liveris and Breen are going to cut out costs and duplications and bring out synergies. Those are overused words, but there is a ton of overlap between the two businesses and the CEOs can pick and choose which plants they want opened and which ones can be closed. Management used a $3 billion cost synergies figure. I think that's a low-ball and there will be much more in savings.
On a managerial level, Liveris will serve as executive chairman and oversee the specialty materials company; Breen's going to be CEO and oversee the other two companies.
This whole combination and distribution will most likely take several years to pull off. It's also no slam dunk when it comes to antitrust issues, as its agricultural business does eliminate some needed competition.
So you will have to wait for a long time to see the real fruits of the merger.
But we have decided we want to hold on to Dow for the trust because you are being paid to wait with a more than 3% yield and we would have bought stock today had we not been restricted from purchasing it because I talked about it this morning and the trust's rules prohibit trading that day in a stock that I mention on air.
While I am at it, I want to salute Peltz for his persistence in making something happen here. Last summer, after Peltz was rebuffed from the DuPont board after a bitter proxy fight and the stock fell more than 20 points on the news, he urged viewers at CNBC's Delivering Alpha conference to stick with DuPont because he wasn't giving up pressuring for higher returns. I was incredulous but I said stay the course because Peltz has the best track record of any activist we could find when it comes to making money with his ideas after he's taken a stake. He never wavered and the stock, when you include dividends, has come all the way back to where it was when he lost the proxy fight.
Congratulations to all involved who put this deal together and sorry the stock market couldn't give you more of an instant reward for your efforts. We have a not-so-hot tape right now, not much working, but one day DowDuPont will seem like a pretty darned good idea. Just don't let that day be when the stock's up substantially from this nasty session where the deal was revealed.
