DowDuPont Alert: Bernstein Upgrades, Says 'Too Much Upside' To Ignore

• Shares of E I Du Pont De Nemours And Co (NYSE: DD) have declined 8.35 percent over the past one month, while those of Dow Chemical Co (NYSE: DOW) are down 10.4 percent in the same timeframe.
• Bernstein’s Jonas Oxgaard has upgraded the rating on DuPont from Market Perform to Outperform and raised the price target from $71 to $81, all the while maintaining an Outperform rating and lowering the price target from $67 to $64 on Dow Chemical.
• The two companies announced a merger on December 11, 2015, with a plan to complete the merger in 2H 2016 and split the combined entity into three pieces after 18–24 months.

Analyst Jonas Oxgaard stated that although the deal structure for the DowDuPont merger could have been better “and unlock more value, we see significant upside to both companies.”

Oxgaard also explained that the three pieces the combined entity would be split into would be an agricultural business, a material sciences business and a specialty products business.

Related Link: EXCLUSIVE: Here's What The DowDuPont Merger Means

Market Reaction

However, the market reaction to rumors of the merger was the opposite to its reaction when the merger was actually announced. Both stocks rose about 11 percent the day after the rumors broke, while in the weeks that followed the official announcement, the shares fell to below the pre-rumor prices.

Oxgaard believes that investors were disappointed with several of the items associated with the agreement. “Dow got less than a ‘fair share’ of the combined entity, DuPont updated cost cutting numbers underwhelmed, and the overall proposed final deal structure was deeply disappointing,” the analyst noted.

Upside Potential

While expressing his disappointment with the terms of the deal, Oxgaard stated there still exists meaningful upside for both companies. The merger was expected to be approved by both shareholders and regulators, with only a 10 percent possibility that the deal would fall through.

However, the merger synergies, estimated at about $2 billion, are likely to be underwhelming, although “still accretive and cumulative with existing cost cutting programs at the companies,” according to the Bernstein report.

In addition, there could be additional upside due to ethylene shortages, irrespective of crude prices. Oxgaard also believes that the proposed deal structure could be modified prior to the split, which would lead to meaningful upside.