Activist shareholder buys $1.3bn Dow stake, urges petchem spin-off

21 January 2014 17:13  [Source: ICIS news]

Activist shareholder buys $1.3bn Dow stake, urges petchem spin offHOUSTON (ICIS)--Activist investor Third Point has taken a $1.3bn stake in Dow Chemical and is urging the company to spin off its petrochemical business, arguing that the move would benefit the new company as well as the specialty-focused parent, sources said on Tuesday.

Third Point CEO Daniel Loeb wrote that the standalone petrochemical company could generate more than $9bn in earnings before interest, tax, depreciation and amortisation (EBITDA) on a standalone basis. In comparison, Dow's entire 2013 EBITDA base is about $8bn, Loeb estimated.

Loeb suspected that Dow may be sacrificing operational efficiency or making bad capital-allocation decisions as part of a strategy of subsidising its downstream derivatives with its upstream assets, he said in the note.

The standalone petrochemical company could move away from downstream migration and integration and focus on maximising profits, Loeb said.

"Management could transform these businesses into a best-in-class, low-cost commodity petrochemical company," he wrote.

At the same time, the spin-off would speed up Dow's strategy of becoming a true specialty chemicals company, focusing on agriculture, food, pharmaceuticals and electronics end-markets, he said. Targeting such high-margin businesses has been a long and much-stated goal of Dow Chemical.

A specialty-focused company "should command a premium to Dow's current multiple, and potentially a premium to other specialty chemicals companies given its attractive EBITDA growth prospects", Loeb wrote.

Loeb said the specialty-focused company could achieve EBITDA of $4bn-5bn over the next 3-5 years, compared with a 2013 base of about $2.8bn.

Loeb suspects that Dow is holding back from such a spin-off because it is concerned about maintaining the integration of its upstream and downstream assets.

However, most of the integration in Dow's assets exists within its petrochemical business, Loeb said. Any integration between specialties and petrochemicals is limited to commoditised raw materials.

Such integration does not significantly increase margins − unless the petrochemical assets are subsidising specialty chemicals, he said.

In considering the overall performance of Dow, Loeb noted that the company has generated a return of 46% during the past decade − compared with a 199% return for the Standards & Poors (S&P) 500 Chemicals Index and a 101% return for the overall S&P 500.

"These results reflect a poor operational track record across multiple business segments; a history of under-delivering relative to management's guidance and expectations; and the ill-timed acquisition of Rohm and Haas," Loeb wrote.

Dow completed its acquistion of specialty chemicals producer Rohm and Haas in 2009. It did not release a total price for the deal, but one estimate put it at $15.4bn

Loeb did not disclose the size of his stake. However, a research note from UBS said it is $1.3bn.

Regarding Loeb's comments, Dow said, "We believe our investments have yielded sustainable value for our shareholders and will continue to in the near and long term. We constantly review our company at the management and board level to increase our shareholder value and competitiveness. We intend to continue an open dialogue to further enhance value for all of our shareholders."

The company added, "We engage with all of our owners to understand their views, and we welcome all constructive input with a common goal of enhancing long-term value."

The company's stock traded at $45.23 late morning, up 5.02%. In comparison, the Dow Jones US Chemicals Index was up 0.44% and the S&P 500 was down 0.15%.

By: Al Greenwood
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