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Hedge fund Third Point sharpens criticism of Dow's petchem strategy
12:06 PM MDT | May 2, 2014 | Robert Westervelt
Activist hedge fund Third Point, led by Daniel Loeb, called on Dow Chemical to provide greater detail on its petrochemical operations, arguing that the segment is “underearning” by at least $2.5 billion/year. Third Point says in a 1 May letter to investors that the earnings gap is the result of the “result of a strategy focused more on selling downstream products than on maximizing profits.” Third Point in January urged Dow to consider spinning off its petrochemical operations.
Third Point says its “bottoms-up” analysis based on average industry margin and feedstock slates for Dow’s petrochemical products shows “a meaningful gap between what Dow’s capacities indicate potential Ebitda should be and the amount of Ebitda generated.” The business segments Third Point classifies as petrochemicals are Dow’s feedstocks and energy, performance plastics, and performance materials segments.
Third Point’s says the same analysis of LyondellBasell Industries' petrochemical business, in which the fund includes all of that company’s segments except for refining and technology, shows that the difference between LyondellBasell’s reported Ebitda and Third Point's bottoms-up analysis was negligible. “The result reflects a management team that is focused on being the lowest-cost commodity petrochemical producer and a clear strategy that is driven by profit maximization.”
Third Point says in the letter that Dow and LyondellBasell both generate roughly $6 billion in petrochemical Ebitda despite Dow having 30% more North American ethylene capacity, triple the Mideast capacity, and more downstream derivatives.
Downstream derivatives require a significantly higher headcount and more facilities, R&D, and administrative spending, Third Point notes. “This is the underlying problem with Dow’s strategy,” Third Point says. “Many upstream molecules do not gain incremental Ebitda as they move downstream, often through three to four business units, before they are sold to the end customer.”
Third Point says that "harvesting" the full potential of Dow’s petrochemical assets could require a “combination of closures, modifications, brownfield investments, and divestitures. Our suggestion to management is to make a more clear-cut delineation between low-cost feedstock and downstream value-add and profitability.”
Third Point said in January that Dow was its largest investment, and sources put the size of its stake at that time at around 2.3% of Dow’s outstanding shares.