Friday, December 14, 2007

Dow's New JV: A Game Changer

We found out the reason for the investor day that was delayed in November. The scope of this surprised even me and it does qualify as a "transformational event". Dow Chemical (DOW) just became the world's largest integrated petrochemical processor.

Andrew N. Liveris, Dow Chairman and CEO said "We’re creating a petrochemicals company that will be a global leader from its first day of operation, an $11 billion company that is well positioned to grow profitably across the industry cycle." He continued, “For Dow, this marks an important milestone in our transformational strategy: growing our Basics businesses through joint ventures; reducing our capital intensity; and, freeing up cash to invest in our portfolio of Performance and Market Facing businesses.”

To form the new company with the Petrochemical Industries Company (PIC) of the State of Kuwait, Dow will sell to PIC a 50% interest in the business assets included in the transaction. In turn, both PIC and Dow will place their share of the assets into the joint venture, with each party then taking a 50% equity interest in the new company. The value of the five Dow global businesses that will form the joint venture is approximately $19 billion and Dow will receive approximately $9.5 billion from PIC for the 50% interest.

The JV, to be headquartered in the United States, will manufacture and market polyethylene, ethylenamines, ethanolamines, polypropylene, and polycarbonate used in products ranging from plastic bottles, compact disks and computers to agricultural compounds. The JV is expected to have revenues of more than $11 billion (pro forma) and employ more than 5,000 people worldwide. It creates new global player with enhanced capabilities to grow –especially in China, India and the Middle East. Currently they are working with China's Sinopec on refinery projects in the country.

The JV is not anticipated to require ANY cash infusions from Dow in the future as it will be self financed. On the conference call, Dow said that the current state of the balance sheet as well as the almost $10 billion cash infusion when the JV closes in 2008, will allow Dow to undertake "an aggressive M&A" strategy should they wish. Based on the tone of the call, Dow is st to become a more aggressive buyer in the very near future.

With the debt to capital ration down to roughly 30% from almost 60% in 2003, there won't be much Dow will not be able to accomplish in terms of acquisitions should they desire. Liveris confirmed this by saying, "Frankly, we can now do any deal we wish".

Possibilities? Since Dow did want to merge with DuPont (DD) a little more than a year ago now, it now has the means to just buy the company. A more likely scenario would be Dow buying into DuPont's argi businesses and creating yet another JV out of them. I won't say Sherwin William's again (SHW) as I think I have beat that drum to death. Monsanto (MON) now could easily be swallowed although its price currently may be an issue. The two are already working together on a seed project so a relationship already exists.

Liveris also said, "As far as additional deals to replace the earnings to Dow being transferred into the joint venture, you can count on it". Management followed up later in response to a question about acquisitions or share repurchases saying, "In the absence of value creating acquisitions, we will be aggressively repurchasing our stock".

As of 12/13, the dividend has been maintained or raised for 95 years and has been raised 25% since January 2006 alone a million shares have been repurchased since January 2006 representing almost 5% of shares outstanding.

Liveris finished the investor call by saying.. "Stay tuned, the Dow Chemical Company ain't done yet"..

Believe him..

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