DuPont/Dow – The Considerable Value is All in the Execution

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SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

December 9th, 2015

DuPont/Dow – The Considerable Value is All in the Execution

A combined and then divided DuPont/Dow could achieve a great deal:

  • Focus – an ability to apply the right strategy to each of the three businesses without the need to compromise
  • Outside Ag; the ability to pursue further like for like large deals down the road in industries that remain very fragmented on a global basis
  • Cost and technology leadership

From a “what do I do now with the stocks” perspective the latter point is by far the most important today, as it is the cost opportunity in the combination and division which should drive near term value and, in our view, considerable further upside.

We have written extensively on this subject and on the cost and merger opportunities, and the most recent relevant research is linked below and attached to this call.

Dow vs DuPont – October 30th

Ag Chemicals – November 17th

Done properly, there is probably $5-7 billion of costs that could be extracted from this merger (as much as $3bn in the Ag piece alone – see note) and a combined EBITDA potential of more than $20bn – possibly as much as $24bn by 2017. Initial news suggests $3bn of cost opportunities, but we think this is both speculation and conservative.

With estimated combined net debt at year end of around $13 billion (adjusting for the Dow/Olin deal which closed in October and should have dropped Dow’s net debt by around $3.0bn), and an EV/EBIDTA ratio of 10 (Ag would be higher, commodities lower), we can get to a combined equity value of $187-227 billion.

At the close on Tuesday the combined market cap of the companies was roughly $118 billion.

Even if we assume the lower EBITDA number and give it a multiple of 9x, we get 42% upside from closing values on Tuesday – so DOW at $72 per share and DD at $95 per share – plenty of upside from current premarket levels. The rough analysis above is summarized in more detail in the table below. We would continue to own both names.

Exhibit 1

Source: Capital IQ, SSR Analysis

What is the right EBITDA Multiple?

There are plenty of markers for an appropriate EBITDA multiple for each business and they are summarized in Exhibit 2 below. There has been a premium in DD because of the anticipation of a deal or a cost program, but it is not a stretch to come up with a target average for the company of 10x and a conservative assumption of 9x.

Exhibit 2

Source: Capital IQ, SSR Analysis

The Split

In the table and chart below we show the splits we suggested in our recent research, which not surprisingly creates a commodity business much larger than the rest. We are undecided on the building products businesses and where they should sit, but our natural inclination is always to err on the downside when trying to decide whether something has a commodity future or specialty future – this is generally the right call.

Exhibit 3

Source: Capital IQ, Company Reports, SSR Analysis

Exhibit 4

Source: Capital IQ, Company Reports, SSR Analysis

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