Dow/Carbide approval focuses on core technologies

06 February 2001 17:27  [Source: ICIS news]

How the world has changed in only a few months. The big petrochemicals markets have turned down and demand growth has stalled. Raw material and energy costs have hit the roof. There is a new president in the White House and the threat of the US Federal Trade Commission's (FTC) concerns over the Dow/Union Carbide merger have been blown away.

Perhaps it ever had to be that way. Dow and Union Carbide made a lot of sense. The merger creates a polyethylene (PE) and ethylene oxide/glycol (EO/EG) giant. And, certainly, one that is better able to compete globally in businesses where competitive intensity is reaching fever pitch.

It is surprising that the FTC has not made more of the North American market share that the merged company will have in linear low density polyethylene (lldPE) and EO/EG. It has been persuaded, surely, that size does matter in petrochemicals and that the US needs an even stronger domestic competitor to hold its place on the global stage.

That global stage is changing rapidly too. There probably are more competitors in PE and EO/EG now than when the deal was first announced. The Dow/Carbide merger shifts the balance of power in petrochemicals but it does not, in the bald mathematical terms used by the FTC, change the competitive landscape.

The FTC ruling has focused on what really matters in PE - technology. The new catalyst technologies have the ability to transform this and a lot of other polymer markets. By following the European Commission's (EC) lead in tackling the potentially monopolistic situation in lldPE technology, the FTC has driven to the heart of the matter.

The Dow/Carbide merger process is creating a stronger player in the PE technology race alongside and Exxon/Mobil. The FTC and the EC decisions give BP Chemicals significant, technology-led PE opportunities.

Regulatory approval of Dow/Union Carbide has come a year later than expected and business conditions have changed markedly. The venture was set to be launched at a reasonably high point in the cycle. The main difficulty at the time was higher US raw energy costs.

The much tougher business environment will pose a real challenge for Dow and test the company to the fullest. Dow is well known in the industry for running a tight ship but, then again, Union Carbide, historically, was one of the better performers in petrochemicals.

Dow identified cost savings of $500m (Euro536m) following the transaction and gave itself two years from completion to realise them. Dow chief executive Michael Parker says now that more than this amount will be realised within the two-year time frame.

Undoubtedly, Dow benefits greatly from the merger which sees Union Carbide becoming its wholly-owned subsidiary. It will be able to lever the Union Carbide products through its distribution and marketing network, and benefit greatly from the geographic fit in basic chemicals such as ethylene and EO/EG as well as PE - and to a much lesser extent in polypropylene (PP). The numbers will have to be re-worked but Dow/Union Carbide will be in a position to compete more effectively with the big new capacities coming onstream and planned in the Middle East.

Beyond that, Dow/Union Carbide is a good fit in adhesives, sealants and coatings - a business estimated at the time of the deal announcement to be worth $4bn at post-merger. So-called 'niche' products, such as heat transfer fluids, plasticisers, antimicrobials and heat transfer fluids, added up then to a $3bn segment. Based on 2000 figures, Dow and Union Carbide had combined sales of $28.4bn, earnings before interest and tax of $3.1bn and assets worth more than $36bn. Parker has re-iterated Dow's financial objective of growing earnings per share by 10% across the cycle.

Dow has not got everything it wanted from this merger but the core remains intact. Realising the top line growth will be more difficult than at first expected in the (then) operating environment - but then, as Dow has said many times before, it knows these businesses.

Certainly, the loss of gas-phase PE technology and the contribution of the Union Carbide Unipol production technology to the Univation Technologies venture with Exxon Mobil is a blow, but it does preserve competition in the rush to develop, particularly, metallocene catalysts in the gas phase. Dow will continue to receive royalties from Unipol licences granted before the formation of Univation, which are not inconsiderable, but it will not have income from future developments.

Other issues have also yet to be resolved - particularly the PE assets tied into the Union Carbide/EniChem joint venture, Polimeri Europa. EniChem was far from happy at the time of the EC ruling on Dow/Carbide, claiming that it had not been consulted on the proposed divestment. It does not want to take on the venture and there has been little outside interest. There are, particularly, local difficulties to surmount before this piece of the jigsaw can be slotted into place.

Both Huntsman and Ineos have emerged as winners from the merger approval process. Huntsman acquires nearly all Dow's ethyleneamines business and Ineos will take parts of two amines businesses.

By: Nigel Davis
+44 20 8652 3214

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