Wall Street hails Dow/Olin chlor-alkali, derivatives deal

Focus article by Joseph Chang

HOUSTON (ICIS)–Wall Street is hailing the planned merger of Dow’s chlor-alkali and downstream assets with Olin in a tax advantaged Reverse Morris Trust (RMT) transaction to create a $7bn industry leader.

“Dow received more than we initially expected and the synergy targets for the transactions seem achievable. Overall, the financials seem positive for both parties,” said Charles Neivert, analyst at Cowen.

Shares of Olin surged $3.81, or 14.0%, to close at $31.00 on 27 March, while Dow rose $1.32, or 2.8% to $47.76. Olin had traded as high as $34.34 – up 26.3% earlier in the day.

The combined Olin will have pro forma 2014 earnings before interest, tax, depreciation and amortisation (EBITDA) of $1.0bn, and cost synergies are anticipated to reach $200m/year by the third year.

Earlier in the day, Dow announced a deal to merge its US chlor-alkali and vinyls, global chlorinated organics and global epoxy businesses with Olin for a total value of $5bn.

The deal is expected to close by the end of 2015 and would create the global leader in chlorine with 5.65m tonnes/year of capacity.

This is a positive development for Dow in terms of credit profile, noted John Rogers, analyst and head of North American chemicals for Moody’s Investors Service. Moody’s rates Dow at an investment grade Baa2, which is an equivalent of BBB by Standard & Poor’s Ratings Services (S&P).

“Dow received more for this business than expected,” said Rogers.

The deal “is a credit positive as it will reduce debt and other debt-like liabilities, including the [joint venture] debt of Dow-Mitsui Chlor-Alkali…, improve its financial flexibility and allow it to effectively buy back over $2bn of its shares,” he added.

The deal involves the payment of $2.0bn in cash and equivalents to Dow, $2.2bn in Olin stock based on the closing price on 25 March (around 81.3m shares at $27.06/share), and a transfer of $800m in pension and other obligations from Dow to Olin.

In the RMT transaction, Dow shareholders will receive around 50.5% of shares of the new Olin, with existing Olin shareholders owning 49.5%.

At a total enterprise value of $5bn to Dow, the deal represents a multiple of around 8 times 2014 EBITDA – relatively healthy for a commodity chemical asset.

The new Olin will take on additional leverage, increasing pro forma 2014 net debt/EBITDA from 2.0 times to 3.0 times. Olin aims to bring that leverage ratio down to around 2.5 times by the end of the second year after closing as it delivers on cost synergies.

Even as Olin will take on additional debt and liabilities, there is no immediate ratings impact for Olin (rated Ba1, S&P equivalent of BB+) from Moody’s perspective, as the deal “will improve scale and earnings diversity”, said Anthony Hill, an analyst at the ratings firm.

In a separate deal, Dow and Olin agreed to a 20-year agreement for ethylene supply from Dow to Olin at co-investor or producer economics.

Dow will receive an up-front payment of around $390m from Olin as part of the ethylene supply deal, noted Cowen’s Neivert.

“New Olin will need this ethylene to produce some of the downstream products it will have as a result of the transaction,” said Neivert.

“The volume of the contract will be in line with what is needed to operate the assets at current capacity, giving Olin advantaged input costs,” he added.