INSIGHT: Dow seeks the step-out deal

14 December 2007 16:39  [Source: ICIS news]

By Nigel Davis

Dow will put Prentiss, Alberta, PE into its PIC JVLONDON (ICIS news)--Dow is done with its so-called “asset light” strategy following the $19bn olefins and polymers deal with Kuwait’s PIC, chairman and CEO Andrew Liveris said on Thursday. The focus now is on specialities.

Turning Dow around – or should that be tuning Dow in – to today’s chemicals realities has been no easy task. And it has not come as quickly as many in the business might have expected, even to agree the MoU (memorandum of understarstanding) with PIC (Petrochemical Industries Co).

But Dow’s big asset light joint venture should not come as a surprise.

It builds on already successful Kuwaiti partnerships: Equate, MEGlobal and Equipolymers. The new $14bn company - measured in sales if combined with the existing three Kuwaiti Dow ventures - would have ambitions to grow, particularly in places such as China, India and the Middle East.

Analysts have welcomed the deal and the market reacted positively. The venture has room to grow; gets Dow out of some difficult businesses where low-cost feedstock positions are key and gives the company an estimated $7bn in cash to help it continue to realign the portfolio.

At the operational level, Dow retains important cracker-based petrochemicals assets in Terneuzen, the Netherlands, and Boehlen, Germany; in Joffre, Canada (the joint venture with Nova), Freeport, Texas, and Plaquemine and Taft, Louisiana.

Importantly, and as Dow says, it “preserves the vertical integration for Dow’s performance businesses".

And it is on these performance businesses that the future lies and on which Dow’s performance from hereon will be judged.

“We can now pay all the time and attention we need to getting it right on the performance side,” Liveris said on Thursday in an interview with ICIS.

Dow says it will focus on four growth platforms for specialties: human health (food, nutrition, wellness); energy (alternative energy solutions, energy efficiency solutions); infrastructure and transportation (construction, water treatment, transportation); and electronics and communication (advanced materials).

Liveris thinks Dow will have sales of between $50bn-60bn in five years' time and that 70-80% of those sales will be generated from high added-value businesses.

If the PIC venture had been in place last year, Dow would have turned over $38.3bn (against a reported $49.1bn) and produced a net income of $3.4bn (actual $4.1bn).

Dow wants stronger growth and a more consistent earnings profile. It has been working to that end for years, of course, but has a troubled track record.

Not so long ago management took its eye off the ball financially and the negative fallout needed a lot of fixing. Dow has performed strongly over many recent quarters but has had to battle hard against high energy and feedstock costs. It has, however, been burdened by the threat of deep seated cyclicality.

As one of the top three major western chemical companies, it fully understands where the future lies.

The PIC deal has been called the “penultimate” step for Dow as it tries to shift its portfolio away from cyclicality and the difficulties of addressing, somewhat on a piecemeal basis, the sort of advantaged feedstock ventures it would need to continue to play at full strength in olefins and polyolefins.

It cannot be clear yet but either Dow or the new venture will pursue the big deals in Middle East and China.

Driving Dow harder towards its performance goals will involve acquisitions but Dow is stressing that it will remain targeted and look for ways to really add value.

“This is not the old Dow,” Liveris said on Thursday. “We are not going to just go buy a specialty chemical company because we have cash. I want to mimic a company like GE that has very methodical disciplines about where it will grow - looking for discontinuities and new needs based on technology and markets that it can serve.”

So when considering Dow’s next move, it pays not simply to look at the obvious specialties suspects.

Liveris did not discount interest in the industrial gases giant Air Liquide at least in terms of the size of a potential acquisition. Dow is as likely to go downstream in one or more of its main areas of specialty focus as it is to look seriously at a specialty chemicals player.

The real question is how Dow might make technologies and assets from any acquisitions fit with its own to provide new opportunities.

Dow’s future, Liveris is saying, is wedded to performance products. Its opportunities lie in understanding where and how it might be able to step into new and possibly emerging more specialised markets.


By: Nigel Davis
+44 20 8652 3214

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