INSIGHT: New Dow will have to capture growth

23 September 2008 17:56  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Dow Chemical’s ‘transformation’ is ongoing but the company took the opportunity last week to stress to investors its stability.

Hardly surprising given current financial turmoil and the tottering global banking systems but Dow highlighted its 96-year history of uninterrupted dividends and a dividend yield of 4.7%.

Manufacturing industry will not emerge unscathed from the hurricanes of change storming across the globe.

The stock and oil markets’ reaction on Monday and Tuesday this week to the uncertainties surrounding the US government’s $700bn bail out package for banks saddled with so-called ‘toxic’ loans demonstrates that.

Chemical companies will be constrained by stasis in the credit markets. They could be crippled by volatile and apparently escalating oil prices that in a declining chemicals market cannot be passed on in higher prices.

Dow says it has solid financing in place to acquire US specialty company Rohm and Haas.

Following Bank of America’s investment conference in San Francisco, BoA analyst Kevin McCarthy said that the $18.8bn Rohm and Haas deal was not contingent upon the K-Dow venture with Kuwait's Petrochemical Industries Co closing.

Observers have raised some questions over the final deal that Dow might strike with PIC, the gestation period for this venture having been so long.

Dow says that the deal will close in the fourth quarter and that “day one” of K-Dow Petrochemicals will be before year-end. The company says it is on track to close the Rohm and Haas acquisition in early 2009.

Dow can be expected to make significant cost savings as it integrates Rohm and Haas and creates a new, Philadelphia headquartered, business unit.

But taken together the deals do have the potential to transform the company with a sharp portfolio shift towards businesses that can deliver potentially higher added value and stronger growth.

The challenge for Dow management, of course, will be to make that happen.

The K-Dow venture preserves the vertical integration for the performance businesses, Dow says, while at the same time opening the door for the venture businesses to capture low-cost feedstocks for future growth.

K-Dow could grow especially in China, India and the Middle East, Dow said in its latest BoA presentation.

On the olefins side, Dow will contribute the crackers at Fort Saskatchewan in Canada, Bahia Blanca in Argentina and Tarragona in Spain to the venture. The Tarragona unit includes an octene manufacturing facility.

Alongside that K-Dow will have ethylene supply agreements for Dow’s other ethylene plants.

Once in place, however, most eyes will be on how Dow develops its other, performance, or market-facing businesses and incorporates Rohm and Haas into the new advanced materials operating segment.

The Rohm and Haas deal offers the greatest potential for growth. Dow is acquiring a good company but one that is under pressure as the US economy wilts and chemicals growth slows.

For Dow the acquisition will help create leadership positions in some important growth segments and, in a point that is often lost when acquisitions are concluded, help fuel innovation-led growth.

It is usually not easy to determine until well after closing just what innovation fits there are between different companies and different businesses. The trick has to be to make them deliver more than simply the sum of the parts.

Dow wants more stable earnings and higher growth from a portfolio which it says will be two third specialties. The so-called market-driven businesses will include Dow’s performance products, its health and agriculture operations and Rohm and Haas' Advanced materials.

Dow including Rohm and Haas can tap into businesses with sector-wide growth rates of 5-7%, it has said, compared with 2007-2012 forecast growth rates for the businesses Dow is in now of only 4%.

The K-Dow venture and the Rohm and Haas integration raise more questions than it is possible now to answer.

What shape will the new Dow really take, for example, when the deals are done? Will the integration synergies in the new system from cracker to specialty product really work?

The opportunities for K-Dow are significant but can it be successful in countries like India where Dow has had problems confronting the Carbide legacy? What does the future hold for Dow’s planned mega-project with Saudi Aramco?

Dow is on course to making a notable step change in its structure and one that will ultimately alter the mindset of the group.

The realigned Dow has to be adept at capturing growth in established as well as emerging markets, in new businesses as well as old.

To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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