Investor challenges to DowDuPont spinoffs create uncertainty in Delaware

Four activist investors may join forces to thwart plans by DuPont Co. and The Dow Chemical Co. to split into three independent businesses within 18 months of completing their $150 billion merger.

If successful, the activist investors — including longtime DuPont foe Nelson Peltz — could force the united DowDuPont to split into as many as six separate businesses.

Such a move could create thousands of additional jobs in Delaware.

Or it could leave the First State with a few weak businesses that will exist only briefly before being acquired by a larger corporation. 

"It could go either way," said Matt Arnold, an analyst with Edward Jones in St Louis.

Dow and DuPont are on track to finalize the merger next month. Once completed, DowDuPont will spend the next year planning the size and scope of the new businesses. 

Two of the proposed spinoffs — an agriculture company and a specialty products business — will be headquartered in Delaware. A third business focused on material sciences will be based in Dow's hometown of Midland, Michigan. 

But the activist investors are trying to derail that plan, according to a report in the Wall Street Journal. The coalition is pushing for DowDuPont to create more spinoffs that will be leaner and more focused.

More companies would increase each spinoff's value, likely generating a windfall for stockholders, including the activist investors pushing for more companies. 

"The narrow focus can ultimately result in a higher market valuation for each company, either as a takeover target or because they can be more successful as a standalone business," Arnold said. 

Jana Partners, Glenview Capital, Third Point LLC and Peltz's Trian Fund Management are the activist investors criticizing the current breakup plan. That has some in Delaware worried about how things could shake out if the investors are successful.

"All these types of seismic shifts — whether it is DuPont or AstraZeneca or the GM plant — are of concern," said Sen. Anthony Delcollo, a Republican who represents the district where DuPont's Chestnut Run headquarters is located.

"The types of jobs these businesses could create are middle-class jobs in the sectors that Delaware has traditionally had strong footprints like science and innovation," he said. "We need to do what can be done to encourage any additional spinoffs to be in Delaware." 

DuPont spokesman Dan Turner said the company is committed to creating two Delaware spinoffs, but left the door open for the possibility of additional businesses. Last month, Dow and DuPont tapped business and management consultant McKinsey & Co. to review its post-merger spinoff plans. 

"Dow and DuPont leadership are committed to maximizing the tremendous value creation potential of the merger and anticipated spins," he said in an e-mail. "If the results of our review demonstrate there is net greater long-term value creation to be realized through a change in the portfolio, it will be pursued."

Smaller companies with innovative products could be an enticing acquisition for a larger industry player. Typically, large conglomerates try to gobble up leaner players because such businesses are easier to integrate into a larger corporate structure. "A lean company that makes something unique and doesn't have a lot of overlap would be an attractive target," said Jim Butkiewicz, chair of the University of Delaware's Economics Department. 

Rich Heffron, president of the Delaware Chamber of Commerce, is bullish on the idea of additional but smaller spinoffs coming to Delaware. 

"I think this will be to our advantage," he said. "DowDuPont will only do this if those companies are going to be successful and if they are successful, they will grow." 

For now, uncertainty surrounds the spinoffs and activist investors' voices are growing. Daniel Loeb, who runs the hedge fund Third Point, began making noise about a six-way split of DowDuPont in May. Now Loeb has been joined by three partners who will continue to put pressure on the companies to rejigger the spinoff plans.

So far, much of the investors' ire has been directed at the material sciences company. They contend that Dow Corning, a joint venture between Dow and Corning Inc. that makes silicones used in laundry detergent and building insulation, is too big for the material sciences spinoff. 

The activists allege Dow Corning belongs in the new specialty products business, a move that could be good news for Delaware. But Dow executives have defended the decision to keep Dow Corning in the material sciences company, indicating they won't bow to investor pressure.

"Dow has spent a pretty considerable amount of time making the case why Dow Corning makes sense to reside in the materials company after the breakup," Arnold said. "They made a case that they were able to improve the profitability of the material company by combining it with Dow Corning." 

Dow and DuPont have responded to the investors' demands last month by hiring McKinsey. The lead director for each company will work with McKinsey to oversee the process. DowDuPont's board will review the results after the merger closes, the companies jointly announced in June. 

However, it is not clear if the McKinsey review will lead to any fundamental changes in how the two Delaware spinoffs are structured.

"I think [the review] is looking at each individual business and where it should go and why," Arnold said. "I don't think there is a focus on a specific thing." 

Contact Jeff Mordock at (302) 324-2786, on Twitter @JeffMordockTNJ or jmordock@delawareonline.com.