Dow Chemical has agreed to separate a significant part of its chlor-alkali and derivatives businesses and merge them with Olin in a deal valued at $5 billion. The transaction would see Dow combine its US Gulf Coast chlor-alkali and vinyl, chlorinated organics and global epoxy businesses with Olin in a tax-efficient Reverse Morris Trust transaction. This would effectively more than double Olin's scale and create a low-cost industry leader with revenues approaching $7 billion, the companies said.

The transaction includes $2 billion of cash and cash equivalents to be paid to Dow; an estimated $2.2 billion in Olin common stock based on its value at close of 25 March, 2015; and around $800 million of assumed pension and other liabilities.

The boards of directors of both companies have unanimously approved the deal. However, the transaction remains subject to a vote by Olin shareholders as well as the customary closing conditions and regulatory approvals. It is expected to close by the end of this year.

The merger will result in Dow shareholders receiving approximately 50.5% of Olin shares, with existing Olin shareholders owning about 49.5%. Olin will continue to be headed by Joseph Rupp and a senior management team made up of both Dow and Olin current employees. Three new members nominated by Dow will join the existing nine directors on Olin's board.

Olin is expecting that annualized cost synergies of at least $200 million will be achieved within three years. These will come from a network optimization that will facilitate increased output, significant logistics savings and benefits as well as the potential for expanding existing Olin and Dow products into additional geographies and customers.

Annual revenues of the combined business are anticipated to be approximately $7 billion and EBITDA is expected to be $1 billion on a 2014 pro forma basis, excluding synergies.

In a separate, arms-length transaction, both companies have agreed a 20-year capacity rights contract for Dow to supply ethylene from its grid on the US Gulf Coast to Olin. Dow will receive payments up-front while Olin will receive ethylene at "co-investor, integrated producer economics". This agreement is in addition to the aforementioned financials for the chlor-alkali and derivatives transaction.

Commenting on the move, Dow's chairman and CEO, Andrew Liveris, said: "We have jointly created a solid foundation for success for Olin, driven by the benefits of greater scale, an enhanced ability to capitalize on globally advantaged cost positions backed by US shale gas economics, technology advantages, broader market access and significant envelope integration." Liveris added Dow would exceed its target to divest $7 billion to $8.5 billion of non-strategic businesses and assets with this transaction.

Joseph Rupp, Olin's chairman and CEO, said: "This transaction is a natural fit to our strategic objectives - creating a sustainable, long-term growth platform and enhanced shareholder and customer value.

Dow will be an important anchor customer of Olin as it grows the acquired business. Their relationship will include several long-term supply, service and purchase agreements to support downstream products aligned with Dow's market focus.