INSIGHT: Dow gears up for asset light downturn

26 January 2007 17:19  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Think of Dow Chemical. Think of M&A.

The chemicals giant wants to push further with its ‘asset light’ strategy. The polystyrene (PS) and polypropylene (PP) businesses are in the frame.

A move on styrenics could be expected “anytime soon” Dow chief executive, Andrew Liveris, said on Thursday. Dow is looking for partners with potential. By that it means assets and market presence.

Dow has said it wants to work with companies that offer added strengths such as feedstock integration or expanded geographic reach. About half of Dow’s styrene capacity is back integrated into benzene. The ME Global glycols business is a useful model for what it wants to do.

Dow is clearly looking critically at its commodity businesses. And it wants to push harder in performance products. It can up its game in the latter through research and with the right bolt-on acquisitions.

The purchase at the end of 2006 of Byer's the Wolff Walsrode cellulosics business is an example of what can be done. The acquisition of bigger companies with numerous divisions that could raise anti-trust issues is not that attractive. Dow is not that interested, apparently, in GE Plastics.

Collating current performance product lines to create market –focused business groups is a current trend. Dow Water Solutions was put together last year. This year Dow wants to launch new businesses in coatings and footwear. The company is looking at 12 additional market facing business opportunities, Liveris says. Not all will come to fruition but they highlight the direction management wants to take.

Liveris was bold enough when talking to financial analysts on Thursday to, in his words, “put a stake in the ground” on Dow’s potential earnings in the next trough. Dow earned $2.76 a share, excluding unusual gains and charges, in 1995 at the peak of the last cycle. It earned $4.37 a share in 2005 and $4.25 a share in 2006.

In the intervening period, Dow bought Union Carbide - in 1999 for $11.6bn (then equivalent to €10.8bn) - and suffered heavily from the consequences, including the loss of a chief executive.

Liveris says Dow earnings in the next trough can translate to the mid range of $2 to $3 a share. But to get there the profile of the company will have to change.

A perennial problem with Dow is that it is seen as a commodity chemicals player and not a company quick to capitalise on high growth asset light ventures, research and performance products. Liveris has a tough job on his hands in wanting to change that.

Currently on an earnings ridge, he believes Dow can continue to perform through the next trough that is expected now towards the end of the decade. He has to convince the market that Dow is a forward looking player and not a company inextricably tied to the ethylene price or to its miserable 2001/2002 performance.

By: Nigel Davis
+44 20 8652 3214

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