INSIGHT: Dow rumours highlight global ambition

01 March 2007 17:20  [Source: ICIS news]

LONDON (ICIS news)--Dow Chemical found itself in the limelight earlier this week as British newspaper reports picked up on private equity interest in the chemicals giant. And, hardly surprisingly, speculation mounted again of a possible deal with an emerging chemicals powerhouse, India’s Reliance Industries.

Many analysts see a Dow break-up as highly unlikely but as the old adage goes, there is no smoke without a fire. Dow can be expected to do something soon with parts of its bulk chemicals businesses – with styrenics and polypropylene for a start. The big question is whether more than simple portfolio re-shaping is likely if indeed possible.

Undoubtedly there are many big deals in chemicals to come. Increasingly these will involve the newer, faster growing aspiring chemicals sector leaders, if not funds prepared to lay out possibly tens of billions of dollars with an eye to achieving break up values.

Currently BASF, Dow and Sabic vie for top slot in the sector, but look at how privately held Ineos has climbed the petrochemicals ladder and how Sabic, Saudi Arabia’s chemicals powerhouse, continues to perform.

The centre of gravity of the chemicals business is shifting fast - and not simply in bulk petrochemicals. Over the next few years newer players from Asia and the Middle East will take an increasingly important role in key segments of the business.

Big deals, however, require big egos and the ambition to drive them. Private equity has both in abundance. On the industrial scene, Reliance Industry’s Mukesh Ambani stands out as an executive who wants to even better his father’s legacy of creating India’s largest publicly held company.

Reliance has grown fast in petrochemicals, in upstream refining and oil exploration. It has moved into telecoms and is pushing hard now into retail. But just how strong is Mukesh Ambani’s and Reliance Industries’ global ambition?

The company would welcome a more global reach in petrochemicals and a boost to its polypropylene business. It wants a foothold in the Middle East.

Dow is pursuing an asset light strategy in commodity styrenics – chief executive Andrew Liveris said in late January that an ‘asset light’ styrenics deal (in other words, a joint venture) might be expected soon. He signalled that something similar was sought in polypropylene.

Aspiring players from Asia spring to mind as potential candidates but Dow appears to want to model new ventures for its bulk businesses on ME Global the Middle East centred monoethylene glycol joint venture. Does one or more of the Middle East petrochemicals players with access to benzene fit the bill? There aren’t many of them.

The question remains as to whether a larger bulk petrochemicals joint venture could be on the cards. As far as India is concerned for Dow there are legacy issues with Union Carbide that would have to be carefully addressed. However, it still pays some chemical firms to think big and Reliance Industries stands out amongst them.

Britain’s Sunday Express this week seemed to pick up on earlier reports that Dow would receive a takeover bid worth up to $54bn, or about $60 per share, from a group of private equity firms. These would include Kohlberg, Kravis & Roberts (KKR), Blackstone Group and Carlyle Group, it suggested.

But as analysts and commentators have pointed out, possible leveraged buyout (LBO) deals are mooted all the time and it is extremely difficult in a giant suggested deal such as this to make the numbers work. Current acquisition multiples too are high and the sector is at or near the top of its cycle.

So should we pooh pooh private equity’s interest in Dow or look to more focused joint ventures or sub-$10bn deals? Whatever is on the cards, Dow wants to focus more on performance products and market focused businesses. These are where value driven growth lies. The industry’s bulk businesses will increasingly left to new low cost global players and regional giants: those with the drive and ambition to see the sector through the next downturn.

By: Nigel Davis
+44 20 8652 3214

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