INSIGHT: Dow is facing 'asset light' dilemma

20 November 2007 16:41  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--A company does not revise its ‘change of control’ compensation scheme for senior executives just before agreeing a major deal - or does it?

Dow Chemical’s modification of this compensation plan, aired in a filing to the SEC (Securities and Exchange Commission), caused a flurry of excitement last week.

The new policy promises CEO Andrew Liveris three times his annual base salary - last year, that was $1.43m - should the company be taken over and Liveris lose his job. Other senior executives are promised two times basic pay.

Analysts don’t think this implies a deal is imminent. But they, among others, are keeping a close watch on the company which has said before this year that it wants to pursue an "asset light” strategy to boost specialities and limit its exposure to commodities.

Joint venture partners for the commodity business could include Petrochemical Industries Company in Kuwait, Saudi Aramco or India's Reliance, Citigroup’s US chemicals analysts PJ Jukevar said this week.

The business as a whole is worth between $19bn and $23bn, he estimates.

In a note to clients, Citigroup reiterates its belief that Dow is on the prowl for a specialties acquisition and to sell or joint venture part of its commodities business. A good fit ‘specialty’ company might be Celanese, Cytec, Valpsar or Ciba Specialty Chemicals, the bank says.

Dow has an “OK fit” with Cognis, Degussa, Chemtura, Johnson Matthey and Lubrizol, it adds.

Dow could also, of course, strengthen its agrochemicals franchise based on strong technology. Buying Syngenta would be a $25bn-plus deal so small bolt-on seed acquisitions seem to make more sense.

The postponement in October of an investor meeting scheduled for earlier this month piqued further Dow deal interest. Even industrial gases firm Air Liquide was mentioned as a possible takeover target but largely dismissed by analysts and consultants.

The big chemical and oil companies have looked over the major industrial players at one time or another over the past decade but shied away from hot pursuit.

Dow appears to be spreading its net far and wide in the search for more sustainable - and less cyclical - growth.

Remember, the company was rocked earlier this year by the dismissal of two of its top executives and advisers, including a former CFO, in allegations of deal making.

JP Morgan was named alongside investors including the government of Oman and private equity groups as planning a possible leveraged buyout.

Since then Liveris has emphasised Dow’s asset light goals, but he has not been drawn on the possible timing of any such “transformational transaction".

Dow has cash and sees the chemicals downturn looming so is under some pressure to move. Its shares have hardly performed spectacularly.

There is probably room for a re-rating if cash is used wisely and the market sees that management has confidence in its earnings power. HSBC put it that way this week.

“We expect Dow to remain range-bound as long as the status quo continues,” it said.

Despite the efforts of management thus far to shift the chemicals giant towards so-called “performance" products, the results have not been reflected in the share price. Dow's shares have underperformed the S&P 500 by more than 30% since November 2004, HSBC notes.

Dow is still seen as a cyclical commodity player. Its acquisition of Union Carbide in 2001 put a firm stamp on that.

Dow lives with the Carbide legacy: sub-optimal petrochemicals plants in the US and the albatross of the Bhopal tragedy around its neck in India.

When the commodity petrochemical downturn hits, it will be badly affected unless it can drive further and harder into feedstock advantaged areas like the Middle East and North Africa and do the right deal in specialties.

Dow’s joint ventures have been doing very well so now would be the time to add more.

The company has some important projects up its sleeve - the ground-breaking Ras Tanura project with Saudi Aramco is potentially the most significant.

But a new joint venture could revitalise the firm. A JV coupled with the right deal on specialties could set the company on a very different track.

Dow seems to be good at planning joint venture projects but not at striking the right joint ventures or deals. Momentum has been lost since the glycols businesses were put into joint ventures in Kuwait.

The disconnection between management’s view of Dow and that of the market has to be addressed.

Time is not necessarily of the essence, but the longer the company lingers in the commodity space the more difficult its position will become.

By: Nigel Davis
+44 20 8652 3214

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