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By Jeremy Glaser and Jason Stipp | 12-11-2015 06:00 AM

Friday Five: Cost Chemistry in Dow-DuPont Deal

Cost savings will be the biggest driver of value in the chemical company mega-merger. Plus, Kinder's wakeup call for MLP investors, more muddle at Yahoo, and no room for error in Costco's share price.

Jason Stipp: I'm Jason Stipp for Morningstar. Welcome to The Friday Five, Morningstar's take on five stories in the market this week. Joining me with The Friday Five is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Jason.

Stipp: First this week, chemical giants Dow and DuPont are set to merge. This is capping off a big year of M&A in the market. What's our take on the deal?

Glaser: When we look back at 2015, M&A is going to be one of those big trends. Across industries, big deals, small deals, a lot of M&A happening. This deal is the capstone: Two $60 billion companies coming together.

After the merger, they are planning on splitting into three companies that will be focused on specialty chemicals, agriculture, and materials. Jeff Stafford, who covers chemicals for Morningstar, thinks this deal is about cost savings. They'll be able to save money on research and development. They'll be able to save money by reducing head count in a lot of places, and that's where you find the synergies in bringing them together.

Often there is hope that when you split companies apart, maybe it unlocks value, and people will be able to put a higher multiple on different businesses that may have better growth prospects. But he doesn't think that's going to be a major factor here. He points to agriculture as a good example. The ag business combined still won't have the same kind of competitive advantages as, say, a Monsanto. So you can't just say, well, Monsanto trades for this multiple and therefore this other company will also trade for that, too. It probably will be at a discount.

But overall he thinks those cost savings probably will be large enough to make a deal like this make sense.

Stipp: In MLPs, Kinder Morgan announced a steep 75% dividend cut. That business is obviously under pressure. You spoke with Josh Peters about this. What's the take there?

Glaser: They had this big 75% cut. Management is completely focused on the balance sheet right now and completely focused on keeping their investment-grade rating, which is very important for them to fund their continued growth projects. We think it's going to be some time before they will be able to bring this dividend back. It's not something that you can kind of keep low for a year or two and then be able to get back to dividend growth. It's going to be a while until these projects are funded, until the balance sheet looks like it's going to be in a better state, and the rating agencies are going to be comfortable enough with that dividend going up again.

As you mentioned, I talked to Josh Peters, the editor of DividendInvestor newsletter, and he says this is a wakeup call to any MLP investors, to any midstream investors, who aren't aware yet of some of the problems that the industry is facing right now.

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