Dow – Setting Up For A Spin
Dow Chemical’s announcement today sends a very clear message that the company does not expect to be able to sell the chlorine related assets it has talked about divesting for the last 6 months, and that some sort of spin or split is the most logical way forward. While the company may find parties interested in each of the assets and each of the locations indicated for sale. The complications associated with both supply and off-take agreements are likely to lead Dow very quickly to the conclusion that the only company with which it can negotiate the terms it wants is itself!
Today’s announcement effectively signals a possible management team for an independent company, which will be needed if a spin is the eventual route taken. It is possible that the company could find a partner to execute some sort of “Reverse Morris Trust” agreement and, as we have suggested in prior research, we think there is a conversation to be had with DuPont, but ultimately a spin or split is likely to be the easier route.
Dow will need to sell power and ethylene to the new company, regardless of who owns it, as well as utilities on the sites that Dow will continue to own and manage (likely to be all of those listed). The terms of those supply agreements need to make sense for both companies; much as Dow would like to retain as much value as possible in the remaining “Dow” it will not serve Dow’s longer-term interest to create a second company that cannot compete because of its costs structure.
Dow will also need to buy from the new company, although not on the same scale.
While the spin or split may be the easiest for Dow to manage, it may not result in a company that the investment community is to happy to own. The US Chlor-Vinyl business could be quite profitable given the low cost of natural gas and electricity in the US, but only if transfer pricing is equally competitive. However, the European assets, primarily in the Epoxy business, are much less valuable in our view and supply agreements here could make or break the company.
Combined with another company, the valuation could be higher as there would be some diversification (though not too much) and perhaps some increased buying power. There might be some integration benefits with some potential suitors such as Olin, Styron or DuPont’s performance chemicals unit. While a combination might mean more work up front, to get the deal done and persuade a third party it was the right move, it may create more shareholder value.