SEE Sealed Air Corporation

The possible merger between DuPont Co. and Dow Chemical Co. would create a chemical-industry colossus spanning industrial materials and agriculture, prompting what would likely be a detailed and lengthy review by government antitrust enforcers.

Combining the two U.S. industrial icons, which would create a company with a market value of more than $130 billion based on Wednesday's share prices, would likely draw complaints from some farmers and other customers wary of market concentration.

Adding to the uncertainty, the merger talks come as U.S. enforcers have blocked several high-profile deals.

Still, a deal could well meet regulatory muster, some analysts said, because Dow and DuPont don't directly compete in many of their biggest products and could divest assets in areas where they do overlap, like corn seeds and housewrap.

"For the last 10 years, the companies have not truly been competitors," said Jonas Oxgaard, an analyst with Sanford C. Bernstein. Dow and DuPont "used to be the two big rivals in American chemicals, but they've gone down completely divergent paths."

Dow, based in Midland, Mich., and DuPont, based in Wilmington, Del., are discussing a merger of equals that would lead to a three-way split of the combined businesses into new companies centered on agriculture, plastics and other chemical-based materials, and specialty products like enzymes, The Wall Street Journal reported Tuesday.

According to people familiar with the talks, the parties have spent little time on antitrust because their lawyers believe there is little concern thanks to the pending three-way split, which is intended to ease pushback. The companies plan to bill the combined company as only a temporary vehicle to cut costs before splitting, and believe there is minimal antitrust overlap across those businesses.

Seth Bloom, a Washington-based antitrust lawyer not involved in the talks, said that combining two large firms isn't necessarily bad from an antitrust perspective. But he also said it won't necessarily help Dow and DuPont that they want to break a combined firm into three new businesses. "What will matter is what kind of position those businesses have in the marketplace," he said.

Dave Andrea, senior vice president and chief economist for the Original Equipment Suppliers Association, an automotive suppliers group, said any combination between major suppliers would prompt customers to evaluate sourcing.

Wendel Lutz, who farms about 500 acres near Dewey, Ill., said he worries that further consolidation among farm suppliers could lead to higher prices at a time when farmers are struggling with three years of diminished crop prices. "Whenever you have a lack of competition, it's not going to be a good deal for the purchasers of those products," he said.

The talks are taking place as both companies have grappled with collapsing commodity prices that have pressured key customers, and a strengthening U.S. dollar that has made Dow and DuPont's products more expensive overseas. The companies are targeting about $3 billion in cost cuts, according to people familiar with the discussions.

In plastics, both Dow and DuPont develop ethylene-based products, but target different portions of the market, according to William Young, managing director at ChemSpeak LLC, a chemical- and agricultural-industry consultancy. To vehicle makers, Dow sells adhesives while DuPont sells under-the-hood components, analysts said. By combining the two, "you get a more full-service supplier," Mr. Young said.

Adding DuPont's relatively modest U.S. ethylene-processing capacity to Dow's would raise the combined entity's annual capacity to 10.3 billion pounds a year from Dow's current 9 billion, and represent about 15% of the national total, Mr. Young said.

Sealed Air Corp., which produces plastic wrap and plastic packaging for the food industry, is a large-volume buyer of resins from Dow, but has scaled back its business with DuPont. A spokesman for the North Carolina-based company said a merger "probably wouldn't have a huge impact on us. DuPont's interest in this business has been waning, but there are a lot of intermediate [companies] that can give you supply."

In the third sector, specialty chemicals, Dow and DuPont sell different products to some of the same customers. For solar panels, Dow sells modular plates, and DuPont sells pastes that help transmit power. DuPont sells enzymes to food makers, while Dow produces polymers for hair gels and lotions.

The Justice Department and the Federal Trade Commission, which review mergers, both have brought notable legal challenges to deals this year. They also have approved other closely scrutinized mergers.

Mr. Bloom, the antitrust lawyer, said he would expect a Dow-DuPont deal to get close scrutiny. "This is not the easiest time to get a deal through," he said. Regulators are "going to do a very granular review."

Sometimes the antitrust agencies consider more than just traditional head-to-head competition between two companies that are seeking to merge.

For example, some antitrust observers had questioned whether the Justice Department had much of a basis to object to Comcast Corp.'s proposed bid for Time Warner Cable Inc., given that the two companies didn't compete head-to-head in the same geographic markets.

Despite the lack of geographic overlaps, the department focused on concerns the deal could cause competitive harm by giving the merged firm too much power over broadband, TV channel owners and the future development of the online video marketplace.

Comcast dropped the deal earlier this year in the face of objections from the Justice Department and the Federal Communications Commission.

David Benoit, Alison Sider and Bob Tita contributed to this article.

(END) Dow Jones Newswires

December 09, 2015 20:25 ET (01:25 GMT)

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