Friday, March 16, 2007

Dow - Something Brewing?

Dow has been the subject a quite a few rumors lately:

First, a British newspaper printed a rumor in February that a group lead by KKR and Carlyle were going to make a $60 a share offer for the company. I went on record at the time with my plea to CEO Andrew Liveris to not sell the company. The rumor subsided (did not "go away") and then market was hit with the events of the past two weeks that commanded everybody's attention.

Then, Tuesday on CNBC's "Mad Money" show Jim Cramer (who I beat to the punch on Google ) commented on the rumors admitting he has been waiting since February for DOW and AA to dip after takeover rumors which were printed a British newspaper. While he discouraged speculation on potential buyouts if the fundamentals are not strong, "the fundies for both DOW and AA are pretty good." According to the rumors, Dow could be purchased by private equity firms at $60 a share, a substantial premium from its present rate of $42.94. He noted the company has a 3.5% dividend yield, has been raising prices and cutting costs. "Buy Dow and Alcoa because when there's smoke, there's fire." Now, while I am not a fan of Jim's bi-polar investment style, I do place value on his market commentary and the insights he gives on the "why" things happen. I also assume that he has plenty of "friends in high places" on Wall St. and given his obvious egomanism, he would not lend credence to a rumor unless the was a good chance there was actually something there. That is not to say that the interested parties are KKR and Carlyle specifically but that Dow is highly undervalued and people are taking a real close look.

Now there are rumors that Dow an India's Reliance Industries are considering a joint venture or a merger. India's top petrochemicals maker, Reliance Industries Ltd , is set to form a joint venture with Dow Chemical Co. for plastics and chemical businesses, the Economic Times said on Thursday."Talks are at an advanced stage and the two sides are expected to make a formal announcement by the weekend," the newspaper said, quoting unnamed sources. Top Reliance officials led by Chairman Mukesh Ambani are scheduled to meet Dow Chief Executive Officer Andrew Liveris and a memorandum of understanding may be signed. A Reliance spokesman denied a deal was in the offing, the newspaper said, while a Dow spokesman said it was not the company's policy to comment on rumors about itself or its activities. The newspaper said Dow was unable to unlock the full value of its huge commodity chemicals and plastics business because of rising cost of feedstock and raw materials in the West. Dow's basic chemicals and plastics business would be spun off into a separate company, with Reliance paying about $12 billion for its stake and Dow picking up the remainder, the paper said in an unsourced report. The Economic Times had reported on Thursday a deal could be be finalized soon and that the two companies were expected to make a formal announcement by the weekend. The Times of India said Reliance would hold the right to buy Dow's proposed 41 percent holding in the joint venture if a third party offered to buy the American firm's stake. Reliance was likely to fund the joint venture by selling some of its stock either to Dow directly or to investors and then investing the cash in the joint venture, the Times of India said.

In my plea the Liveris I expressed my belief that Dow was worth far more on its own long term to me than the quick $60 payoff a buyout would bring. If this joint venture comes to fruition, he would at least seem to believe the same and is taking steps to unlock Dow's long term value. Since taking over in 2004 Liveris has done a brilliant job fixing Dow's financial ship and is now embarking on growth and expansion. The easy thing for him to do would be to cash out at the $60 and walk away. The right thing for us shareholders is for him to keep doing what he is doing..

The business is financially sound and growing. It's stock price is well below its real value and people are starting to notice. It was only a matter of time.

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