News focus: Dow to carve out chlorine and derivatives businesses

06 December 2013 09:45  [Source: ICB]

In a landmark decision, Dow will separate its $5bn chlorine and derivatives businesses for divestiture

US-based Dow Chemical will carve out its chlorine and derivatives businesses for future transactions, representing about $5bn (€3.7bn) in annual sales. This includes around 40 manufacturing facilities at 11 sites, and about 2,000 employees.

Dow will explore all separation alternatives for these businesses, including potential ownership structures and partnerships such as joint ventures, spin-offs and divestitures.

It expects to execute one or more transactions activities related to the assets in the next 12-24 months.

“We are pleased with the early interest we have received from strategic buyers and partners,” said chairman and CEO Andrew Liveris on a conference call with investors.

“These businesses are valuable and competitive within their industries today, which will attractive for the right owner,” he said. “However, the value propositions of these cyclical commodity businesses no longer align to Dow’s future resource allocation given our narrowing strategic market focus and our strict resource prioritisation against our value growth drivers.”

The assets to be carved out include its US Gulf Coast chlor-alkali and chlor-vinyl facilities in Plaquemine, Louisiana, and Freeport, Texas, including its 50% stake in the Dow Mitsui Chlor-alkali (DMCA) joint venture in Freeport.

It also includes Dow’s global chlorinated organics production facilities in Freeport and Plaquemine as well as in Stade, Germany.

Dow will also carve out assets in its global epoxy business, including units at Freeport and Roberta, Georgia in the US; Rheinmuenster, Baltringen and Stade in Germany; Pisticci, Italy; Gumi, South Korea; Zhangjiagang, China and at Guaruja in Brazil.

Also included will be select brine and energy assets in Freeport and Plaquemine associated with the carved out operations.

Of the $5bn in revenue from the assets, about $4bn comprises merchant sales and $1bn for Dow’s internal downstream use, noted chief financial officer Bill Weideman.

Dow executive vice president Jim Fitterling will oversee the separation and transaction activities.

“Due to the highly integrated nature of the chlorine value chain, we are conscious not to leave any stranded costs or create negative synergies,” said Fitterling. “Further, we anticipate that any related transaction or transactions will include supply and purchase agreements between these units and the company to support downstream products aligned with Dow’s strategic market focus.”

CHLOR-ALKALI SHUTDOWN
Dow Chemical will also shut down 1.8bn lb/year (816,000 tonne/year) of old chlorine capacity at Freeport, starting in early 2014. This will be coordinated with the start-up of DMCA which will add chlorine capacity of 800,000 tonnes/year.

“That is a very dated and aged facility that is at the end of its useful life… It is 70 years old and has high maintenance costs,” said Liveris.

Dow is the leading US chlorine producer with capacity of around 6bn lb/year, he noted.

With the carve-out, the remaining Dow is “probably the largest customer [of chlorine] but way less than 50%, mostly because of our polyurethanes”, said Liveris.

Dow has reduced its internal chlorine requirements by around 7bn lb/year since 2005, and has cut capacity in Fort Saskatchewan, Canada, in 2006 and Freeport in 2009 to align production with demand, he said.

POTENTIAL BUYERS
Dow Chemical’s US Gulf Coast chlor-alkali assets would be attractive to major polyvinyl chloride (PVC) producers, Liveris said.

“We’ve received a lot of inquiries, especially from people who want to get access to US shale gas and low-cost energy… These are strategic assets that have a financial benefit for anyone in the downstream PVC business, and the developing world in particular who are seeing PVC as a growth molecule, and are really big investors in US energy and shale,” said Liveris.

Companies that fit the profile of PVC producers in emerging markets that also have invested in US shale gas assets are China’s Sinopec and India’s Reliance Industries.

“These assets are perfectly positioned for anyone who wants to shut down some assets or potentially go for the growth side of it, because there are a lot of companies – including the customers of these assets – that are investing in chlor-alkali in the US because of low-cost energy,” Liveris said.

Companies already building chlor-alkali capacity in the US include US-based Westlake Chemical, Japan’s Shintech and Japan’s Mitsui through DMCA.

US chlor-alkali and downstream PVC producers enjoy cost advantages from US shale gas on two fronts – low electricity costs, which are a major component of chlor-alkali production, and low-cost ethylene feedstock for ethylene dichloride (EDC), which is another feedstock of PVC.

Major US producers of PVC include Axiall, Formosa, Occidental Chemical, Shintech and Westlake Chemical. PVC producers in Latin America include Braskem, Mexichem, Solvay and Pequiven. However, Solvay plans to exit the business. In Asia, major producers include Formosa, Reliance Industries and Sinopec.


KEY CARVE-OUT STATISTICS

  • Annual sales: ~$5bn
  • Sales split: $4bn merchant, $1bn captive
  • Businesses: US chlor-alkali, global chlorinated organics, global epoxy
  • Chlorine capacity: ~6bn lb/year (2.72m tonnes/year)
  • EBITDA margin: 10-15% mid-cycle range
  • Footprint: 11 manufacturing sites, ~40 plants
  • Employees: ~2,000
  • Book value: ~15% of total net property
  • Timing of deals: 12-24 months

Author: Joseph Chang and Franco Capaldo



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