Dow Chemical, DuPont Shares Explode After 'Mother Of All' Merger Report

• Shares of Dow Chemical Co DOW gained more than 11 percent on Wednesday while shares of E I Du Pont De Nemours And Co DD also gained more than 11 percent.
• Media outlets reported the two companies are engaged in merger talks and then break up the combined entity into three separate companies.
• David Begleiter commented in a note that the talks represents "the mother of all (chemical) transactions."

Media outlets, such as The Wall Street Journal, reported the two companies are engaged in advance talks to merge. Following a successful merger, the combined entity will then proceed to split itself into three separate companies: 1) an agriculture company, 2) a materials & materials sciences company, and 3) a specialty products company.

Deutsche Bank: ‘Mother Of All Transactions'

David Begleiter of Deutsche Bank commented in a note that a combined Dow Chemical and Du Pont entity could prove to be "the mother of all (chemical) transactions" given the combined $120 billion market cap.

"We believe the primary driver of the merger is the tax efficient combination of the DuPont and Dow Ag businesses, a combination we believe would be strategically sound, highly complementary and create substantial value," Begleiter argued in his note.

Begleiter continued that the "value creation" aspect of the merger will come from the $3 billion of targeted cost savings. The analyst estimated that discounting the savings for a three-year timeframe results in a present value savings of around $7 per share for Dow Chemicals and around $9 per share for DuPont.

Finally, the analyst suggested that a merger would face "minimal" antitrust risk although the companies will likely be required to divest some parts of the combined agriculture business where there exists "some overlap." In addition, the roughly equivalent size of the two companies should result in a tax efficient merger of equals followed by an equally tax efficient separation of the combined entity into the three proposed companies.