Dow will gain from landmark bid for union carbide

07 August 1999 00:00  [Source: ICIS news]

Combining two of the best performers in chemicals will create a force to be reckoned with in the industry. Over the years , both Dow and Union Carbide have outpaced most others in the business as analysis in Chemical Insight has repeatedly shown. Dow's productivity is legendary; Union Carbide's attention to costs and technology-driven growth, born largely out of adversity, have been well charted. The combined company, the new Dow, faces real challenges but management's assertion that this move is in step with strategy in basics and performance chemicals is believable.

If the deal is completed as planned, Dow will have to prove that it can continue to grow in agriculture and make inroads in biotechnology. A big hit acquisition or a major alliance here was and is unlikely, however. The strategy is to make selected acquisitions to gain access to markets and technology without paying inflated premiums and to invest further in research.

This deal is all about the basics - ethylene, polyethylene and ethylene glycol - and the products that come with them.

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President and chief executive officer, Mr William Stavropoulos, makes the valid point that Dow knows the businesses. There is a strong cultural fit and Dow is gaining a great deal of value. This may be a giant step in Dow's strategy but it is consistent with it. In the first phase of that strategy since Mr Stavropoulos took the helm, Dow focused the portfolio and drove for low-cost production, a more consistent earnings stream and greater financial flexibility. In real terms that meant pushing costs down in basics, focusing more on performance products and selling interests in non-core businesses such as Dow Brands and Destec Energy. In phase two the aim was to get bigger.

This acquisition jump starts the growth phase. It strengthens existing businesses and adds some new growth platforms. It gives Dow more opportunity for higher cash generation from the basic petrochemicals businesses and considerable technological might in polyolefins. In performance products, integration can cut costs, broaden the product and geographical spread and provide further opportunities for growth from bolt-on acquisitions if management gets it right. Dow is certainly getting a lot for its money.

The financial highlights are shown in the table on page three. The new company will have sales of more than $24,000 million ranking it among the world's top three chemical companies by sales The deal is expected to add to earnings and cash flow in 2000. The cost cutting as announced is likely to cover the effective 37% premium Dow has paid for Carbide. Gaining the Union Carbide businesses for $11,600 million in the trough of the cycle is a coup for Mr Stavropoulos and his management team.

It will take time to come to terms with the portfolio but the sales breakdowns supplied by the two companies puts focus on the dominance of performance products such as adhesives and sealants and chemicals based on ethylene and propylene oxide on the sales mix. Performance products will account for 62% of the sales total, or $15,000 million, and basic chemicals, such as ethylene and the major polyolefins, $9100 million. However, it is in the basics that the new Dow will dominate.

This is the deal that others in the petrochemical business coveted. Clearly, some have been thwarted by the rapid pace of consolidation in big oil which has swept chemicals in its wake. Now, Dow has shown that it can put together a deal that is most relevant to chemicals and one which offers prospects for real growth.

Union Carbide has developed a low-cost base for olefins and first-line derivatives outside the US, in Kuwait and Malaysia, which will benefit from Dow's global approach to these businesses. Dow will also benefit from recent Union Carbide capital investment across the board.

The company will have a combined ethylene capacity of 10.8 million tonnes by the end of 2001 predominantly in relatively new, large plants. Production will spread throughout the Americas, where Canada, Brazil and Argentina are currently so important, through the Middle East to Thailand and Malaysia. The new Dow will leapfrog Exxon Mobil to take the number one slot in ethylene. It will hold an estimated 18% of North American capacity and further focus the business on three players, including Equistar.

The strategic fit is most obvious in polyolefins and in linear low density polyethylene where both companies have strong technology positions. Clearly, the merger means that Union Carbide's Univation metallocene joint venture with Exxon Chemical will have to be re-thought but there may also be anti-trust problems to do with technology looming on the horizon. Despite the growth in market share in some products, however, the companies are confident that the merger will mount regulatory hurdles.

If and when it does the potential for cost savings are significant as, I believe, are the prospects for top-line growth. Current estimates are for savings of $225 million in corporate and shared services, $100 million in purchasing and feedstocks and $175 million in supply chain and operating synergies. Dow says that $250 million can be realised in the first year and $500 million in the second.

The new Dow*



Sales 24100


EBITDA 4600


Net income 1700


Market capitalisation** 34700


Sales


Performance segment 15000


Basics segment 9100


Sales


North America 12000


Europe 7200


Rest of World 4900


*1998 pro-forma, $ million ** at 03/08/99





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