By Swetha Gopinath and Sneha Banerjee
(Reuters) - Merger talks between Dow Chemical Co and DuPont (N:DD) to create a chemicals titan with a $130 billion market value lifted Dow shares to a record on Wednesday and put DuPont on track for its biggest daily gain in more than six years.
A potential deal could ease shareholder pressure on the two companies, strengthen their position amid weak demand for farm chemicals, but attract regulatory scrutiny in major markets including China.
Dow shares rallied 11.7 percent to a record high of $56.82. At midday, the stock was at $56.04, up 10.1 percent.
DuPont, a Dow Jones industrial average component, jumped as much as 13.7 percent to $75.72, in what could be its best day since March 2009. At midday, it was at $73.72, up 10.6 percent.
The Wall Street Journal first reported on Tuesday that the companies were in advanced merger talks that would create a chemicals behemoth, then split into three companies focused on agriculture, specialty chemicals and materials.
Dow declined comment on Wednesday while Dupont did not respond to a request for comment.
The deal, described by Reuters sources and other media as a "merger of equals," would value DuPont's stock at as much as $82 and Dow's at as much as $68, trading firm Dragonfly Capital founder Greg Harmon said.
Dow and DuPont are struggling with falling demand for farm chemicals, even as their plastics units have reported higher margins due to low natural gas prices.
A combination would produce a chemicals entity that would then break up into different businesses, people familiar with the matter said on Tuesday.
The combined company could split into material sciences, such as plastics used in packaging and car engines, specialty products and agrochemicals, the sources said, who cautioned that plans were not final. A merger may result in cost synergies of about $3 billion, CNBC reported on Tuesday.
A deal, which would likely face regulatory scrutiny in several countries, would allow the two U.S. companies to rejig their assets.
Their plastics and specialty chemical businesses have benefited from lower energy costs, while agrochemicals have struggled to cope with weak demand for crop protection products.
Antitrust regulators will look at each of the companies' markets, said Seth Bloom, a former official of the Justice Department's Antitrust Division who is now in private practice.
"Clearly it does raise competition questions, given the leadership role of these two companies in the chemical industry," Bloom said.
Low crop prices continue to drive talk of consolidation in the agriculture industry. Just last week, Dow struck a deal to sell part of its global herbicide business.
Syngenta and other major seeds and crop chemicals companies are intensively discussing tie-ups, the Financial Times reported, quoting the Swiss firm's chairman. Monsanto (N:MON) withdrew a deal for Syngenta in August.
Syngenta is No. 1 in crop chemicals with a 19 percent market share last year, just ahead of Bayer's CropScience division with 18 percent. Monsanto is the leader in seeds with a 26 percent market share, followed by Dupont Pioneer's 21 percent.
"LIKE A CHRISTMAS PRESENT"
Reports of a potential deal came a week before the expiration of a standstill agreement between Dow and activist investor Daniel Loeb, who promised to refrain from publicly criticizing the company for a year.
Dow added four independent directors to its board in November 2014, averting a proxy fight with Loeb, who had been calling for a split of the company's petrochemical business from its specialty chemical units.
DuPont faced pressure from Nelson Peltz, another activist investor, to separate its agriculture, nutrition and biosciences units from its building and safety materials divisions.
Peltz lost a proxy battle for DuPont board seats in May, but Chief Executive Officer Ellen Kullman stepped down in October after losing the confidence of shareholders. Her successor, Ed Breen, known for overseeing the breakup of conglomerate Tyco International Plc, was key in starting talks with Dow, analysts and investors said.
Such a deal would have been unlikely even a few months ago, according to analysts and investors.
"I think a deal like this couldn't have happened three (to) six months ago," said Sachin Shah, a merger arbitrage strategist at Albert Fried & Co, noting the companies' sluggish stock performances had made a deal more doable.
As recently as October, Dow CEO Andrew Liveris had said his company was not in the market for "big M&A."
"It would surprise me if Dow is the acquirer after what Liveris has said in the past," said Jack Murphy, portfolio manager with Levin Capital Strategies, which owns Dow shares.
"It's like a Christmas present. We are getting a lot of accretion in Dow's stock today, and we think there will be more going forward."
In June, Reuters reported the U.S. Securities and Exchange Commission was investigating allegations that Liveris misused company funds for personal benefit, according to sources.