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Dow Chemical resists petrochemical spin-off, touts strategy of integration

01.29.2014  | 

Dow only makes commodity chemicals -- such as ethylene and propylene -- to provide ingredients for its higher-value products in agriculture, electronics and plastics, CEO Andrew Liveris said.



Dow Chemical CEO Andrew Liveris defended his strategy of integrating commodity chemicals with specialty products after activist investor Third Point called for the company to spin off its petrochemicals assets.

Dow only makes commodity chemicals -- such as ethylene and propylene -- to provide ingredients for its higher-value products in agriculture, electronics and plastics, Liveris said Wednesday on the company’s fourth-quarter earnings conference call.

“We have a very focused and integrated portfolio, a rising and increasingly growing earnings profile and tremendous financial flexibility,” he said.

Third Point, founded by billionaire Dan Loeb, said in a Jan. 21 letter that Dow is its top holding and could add billions of dollars to earnings by spinning off commodity- chemicals and plastics. 

Dow said at the time that it welcomes constructive input and will keep talking with Third Point. Liveris said Wednesday that Dow can realize more from the commodity business with projects such as its $4 billion plan for US Gulf Coast plants to take advantage of cheap natural gas.

“They seem pretty married to their existing strategy of investing in upstream units to feed downstream businesses,” Matt Arnold, a St. Louis-based analyst at Edward Jones & Co. who recommends selling Dow shares, said.

Science Advantage

The Midland, Michagan-based company will boost investment in businesses with attractive end markets, such as plastic packaging, and in units such as electronics and agriculture where Dow’s science capabilities give it an advantage, said Liveris, 59. The company will continue to cut costs to improve returns at underperforming units, he said.

Recent and planned asset sales show Dow is willing to take the sort of actions advocated by Third Point, Liveris said. It has hired advisers to assist with the previously announced plan to divest as much as $4 billion of operations including chlorine derivatives, he said.

“We have not and will not shy away from aggressive options to exit complex portions of our portfolio,” Liveris said. “When it comes to creating shareholder value, everything is on the table.”

Liveris said Dow achieved its 2013 goals for cutting costs and debt, selling underperforming assets and improving earnings.

Plastics Gain

For the fourth quarter, net income was 79 cents/share, compared with a net loss of 61 cents a year earlier. Profit excluding some one-time items was 65 cents/share, Dow said, beating the 43-cent average of 20 analysts’ estimates compiled by Bloomberg. Sales of $14.4 billion topped the $14.1 billion average estimate.

Dow’s plastics unit had earnings before interest, taxes, depreciation and amortization -- excluding some items -- that jumped 40% in the quarter. The segment accounted for 55% of the company’s adjusted Ebitda as price gains and low US gas prices widened margins.

Dow said in a separate statement that it raised its quarterly dividend to 37 cents from 32 cents and would repurchase $4.5 billion of shares by 2014, increasing a $1.5 billion program announced last February.

Liveris said on Wednesday's call that he hopes improved earnings will lift Dow to where the preferred stock held by Warren Buffett’s Berkshire Hathaway will convert to common shares. Starting in April, Dow has the right to swap the investment into common stock if its shares trade above $53.72 for any 20 trading days in a consecutive 30-day window.

Dow, founded in 1897 as a bleach maker, is the world’s biggest producer of epoxy resins and some grades of polyethylene plastic. It’s the world’s second-biggest chemical maker by sales after Germany’s BASF.

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