17:28 PM | February 12, 2014 | Clay Boswell
Dow Chemical has rejected a proposal by hedge fund Third Point (New York) that the company spin off its petrochemical operations. The benefits of vertical integration, scale, and shared technologies would be lost, while a significant breakup, “simplistically described as petrochemical and specialty chemical assets,” would create no additional value, says Dow.
Third Point, which has reportedly invested $1.3 billion in Dow, presented its position in a 21 January letter to investors that pointed to the company’s “poor operational track record across multiple business segments, a history of underdelivering relative to management’s guidance and expectations, and the ill-timed acquisition of Rohm and Haas.”
Dow’s response, issued on 11 February as an addendum to its fourth-quarter earnings presentation, does not specifically identify Third Point. However, the statement does directly address the hedge fund’s assertion that Dow should hire advisers to consider whether a spin-off of petrochemicals “would drive greater stakeholder value.”
Third Point said in a statement issued 12 February that it would welcome the opportunity to review Dow’s analysis. “Unfortunately, Dow’s lack of transparency means we know neither the methodology nor even the advisors used to arrive at its decision,” Third Point says in the statement. “Transparency is essential considering Dow’s undistinguished track record of capital allocation decisions.”
Third Point says it would sign a non-disclosure agreement to discuss Dow's analysis. “We look forward to having a constructive dialogue among our own financial advisors, CEO Andrew Liveris, and Dow's board, which we believe can ultimately result in significant value for all shareholders," Third Point says.
Dow says it has already addressed the issue. “Dow’s board and executive management team, in conjunction with external advisors, previously and recently conducted an evaluation as part of a broad and thorough review of the company’s strategic options,” says the company. “That review found that a breakup of the company in a significant manner (simplistically described as petrochemical and specialty chemical assets) created no productivity or capital allocation improvements but rather negatively impacted Dow’s value proposition which leverages scale, integration costs, and technology benefits across multiple science-based, vertically integrated value chains.”
Instead, Dow has taken an alternative path outlined by the review, the statement says. “Dow believes that the specific actions it has taken to transition Dow from a commodity-based model into a vertically integrated science company focused on specialty materials, agriculture, and specialty plastics, is the right strategy to maximize value for all of our shareholders in the short and long term,” it concludes.
In a company note issued on 12 February, Jefferies analyst Laurence Alexander estimates the value of vertical integration at $8/share while observing that Dow’s estimate is likely higher. He also highlights Dow’s purchasing power, which he believes could support acquisitions worth up to $5 billion over the next two years.
“Dow's emphasis on evolving into a vertically integrated specialty chemical play suggests management would be reluctant to rule out acquisitions to strengthen its basic energy and feedstocks position or to add a stronger germplasm library,” he says.