US Dow Chemical assets would fit better with Reliance - analyst

08 March 2010 23:05  [Source: ICIS news]

NEW YORK (ICIS news)--US-based Dow Chemical’s ethane-based commodity chemical assets would be a better fit for India’s Reliance Industries than LyondellBasell, an analyst said on Monday.

“We believe a better fit for Reliance would be the K-Dow successor - Dow Chemical’s commodity assets that were earmarked for a 50:50 joint venture with Petrochemical Industries Company (PIC) of Kuwait,” said Alembic Global Advisors analyst Hassan Ahmed in a research note.

“With around 70% of K-Dow’s production capacity based on ethane, Reliance would be purchasing advantaged assets relative to LyondellBasell,” he added.

Ahmed estimates that around 80% of LyondellBasell’s petrochemical capacity relies on naphtha feedstock.

“With a large current disconnect between crude oil and natural gas prices, we see US ethane-based ethylene production at an almost 50% cost advantage relative to naphtha,” he said.

Reliance Industries could set up a JV similar to Dow’s proposed K-Dow partnership with PIC, which collapsed in 2008, or buy Dow’s commodity chemical assets outright, he noted.

“We believe an outright buyout of K-Dow would be at a far more reasonable price than LyondellBasell with Dow management on record as saying they were looking for $8bn-12bn [€5.8bn-8.8bn] [$4bn-6bn in case of a 50:50 JV],” said Ahmed.

Reliance boosted its offer for LyondellBasell to nearly $15bn from $13.5bn on 21 February, but that offer was rejected. The new offer came with stock and cash options for shareholders and creditors, based on media reports.

Ahmed estimates fair value for LyondellBasell at about $13.2bn, based on 60% of replacement value of $22.1bn. Using almost 18 years of monthly data when Lyondell traded as a public company, Lyondell’s shares traded at around 60% of replacement value, he said.

“Industry sources tell us that LyondellBasell will not come to the negotiating table for anything less than $16bn,” said Ahmed.

“At $14.5bn, we believe Reliance would already be overpaying for LyondellBasell and in the process acquire assets which we consider disadvantaged at the current energy pricing regime,” he added.

Ahmed also said LyondellBasell’s rejection of Reliance’s offer “paves the way for LyondellBasell to merge with Hexion Specialty Chemicals - a company held by LyondellBasell bondholder Apollo Management - in preparation for a potential IPO [initial public offering] later in the year”.

Dow Chemical declined to comment on the report and whether it was in talks with Reliance.

($1 = €0.73)

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By: Joseph Chang
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