FMC: The Real Winner in the Dow-DuPont Merger Approval

Editor’s note: With the European approval, the merger between Dow Chemical and DuPont has advanced a lot. The concessions that have to made are not surprising, but the divestiture of DuPont’s insecticides means the loss of a highly profitable business. A clear winner in this context is FMC, according to an opinion piece on SeekingAlpha.com, and this perception is confirmed by the market’s reaction, which sent FMC shares up more than 10% immediately after the deal became public. Here is a portion of that article. 

On March 27, the European Commission cleared the merger between Dow Chemical and DuPont under certain conditions. Dow has to divest some chemical assets and DuPont parts of global pesticide business as well as the majority of its global crop protection R&D organization.

All in all, I would say that green light from the European Union has been obtained rather smoothly and without too much delay, Dow and DuPont notified the European Commission in June 2016, and the expected in-depth investigation (“Phase II”) was started on August 11. This review needs to be formally completed within 90 working days, but delays and further information requests are common so that the finalization of the process was postponed from December to February and finally to March.

Since there is surprisingly little overlap between Dow’s and DuPont’s agricultural businesses, the European Commission had to grant permission after the two companies offered certain concessions.

DuPont will divest parts of its selective herbicides and insecticides portfolio and the majority of its crop protection R&D organization including various early-stage pipeline candidates. The disposal will be part of an asset swap with FMC Corporation (NYSE:FMC) which will in turn transfer its Health and Nutrition business to DuPont. Both units are very attractive high-margin businesses, but the DuPont part generates nearly twice as much revenue so that FMC will pay DuPont $1.2B in cash and transfer $425M of working capital.

FMC will obtain a business that generated approximately $1.4B of revenue and $450M of adjusted EBITDA last year. FMC Health and Nutrition on the other side reported 2016 sales of $707M and an adjusted EBITDA of $228M.

The transaction which resolves any regulatory issues in Europe comes at a high price for the future DowDuPont agricultural company. Particularly the insecticides which DuPont has to divest, are a true pearl in the company’s agrochemical portfolio. The active ingredients rynaxypyr, cyazypyr belong to a proprietary class of insecticides which are patent protected until the mid 2020ies. The products are blockbusters which are still growing, and FMC expects that they will reach a combined revenue of $1B in 2017. The sale is in line with the strategy to give priority to Dow Agrosciences’ agrochemicals business and to concentrate on Dow’s pipeline and its crop protection R&D activities.

The deal will help to grow FMC Agricultural Solutions, and it will transform FMC Corporation into a pure agrochemical player and make it the fifth largest pesticide company globally. Based on the 2016 figures, FMC’s pro-forma revenue will climb by 61% from $2.3B to $3.7B. It will reduce FMC’s dependence on the volatile Latin American market, strengthen the company’s presence in Asia and in Europe, and add unique high margin products to its portfolio.

The businesses which will be transferred to FMC, represent nearly half of DuPont s crop protection sales of $2,854M in 2016. They account for nearly 6% of DuPont’s total revenue and a little more than 8% of the group’s EBITDA.

Read the full article on SeekingAlpha.com.

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