You all know how I feel about CEO’s who make guarantees. Dow Chemical’s (DOW) Andrew Liveris has done it. Here is the thing, based on his track record, there is absolutely no reason to doubt it will be accomplished.
Says Liveris: “We will deliver on these synergies, we will deliver on our new earnings profile. We have walked our talk with every single step we have taken. This is not yesterday’s Dow Chemical, it is tomorrow’s Dow Chemical, an advanced technology – high margin company that is now in pace with the Rohm & Haas deal. So frankly, a great opportunity at these numbers (Liveris was referring to the stock price).
Watch the video:
What to think? Liveris is as straight to the point as they come. There are few people out there with a BS radar as good as Buffett’s. The fact that Buffett wanted to do a deal (without having anything specific in front of him) after meeting Liveris can’t speak large enough volumes to the type of people Liveris is.
That being said it is time for value investors to start getting into Dow.
You all know how I feel about CEO’s who make guarantees. Dow Chemical’s (DOW) Andrew Liveris has done it. Here is the thing, based on his track record, there is absolutely no reason to doubt it will be accomplished.
Says Liveris: “We will deliver on these synergies, we will deliver on our new earnings profile. We have walked our talk with every single step we have taken. This is not yesterday’s Dow Chemical, it is tomorrow’s Dow Chemical, an advanced technology – high margin company that is now in pace with the Rohm & Haas deal. So frankly, a great opportunity at these numbers (Liveris was referring to the stock price).
Watch the video:
What to think? Liveris is as straight to the point as they come. There are few people out there with a BS radar as good as Buffett’s. The fact that Buffett wanted to do a deal (without having anything specific in front of him) after meeting Liveris can’t speak large enough volumes to the type of people Liveris is.
That being said it is time for value investors to start getting into Dow.
From the SEC 8-K Filing regarding Berkshire Hathaway (BRK.A) and Dow Chemical (DOW).
“On July 7, 2008 and July 8, 2008, respectively, the Company entered into equity commitment letters (the “Equity Commitment Letters”) with Berkshire Hathaway Inc. (“BHI”) and the Kuwait Investment Authority (“KIA” and, together with BHI, the “Commitment Parties”) pursuant to which the Commitment Parties agreed to acquire 3,000,000 and 1,000,000 shares, respectively, of cumulative convertible perpetual preferred stock of the Company, having a liquidation preference $1,000 per share (the “Convertible Preferred Stock”), for an aggregate consideration of $4.0 billion. These commitments are conditioned upon the closing of the Merger and are subject to other customary conditions precedent.
Under the Equity Commitment Letters, each share of the Convertible Preferred Stock may be converted at any time, at the option of the holder, into 24.2010 shares of the Company’s common stock, subject to customary antidilution adjustments and certain other adjustments, which represents an initial conversion price of approximately $41.32 per share. The conversion price reflects a premium of 20% over the average of the daily volume weighted average price per share of the Company’s common stock for the period from July 7, 2008 through July 9, 2008. On or after five years from the date on which the Convertible Preferred Stock is issued, the Company may, at its option, at any time or from time to time, cause some or all of the Convertible Preferred Stock to be converted into shares of the Company’s common stock at the then applicable conversion rate if, for 20 trading days within any period of 30 consecutive trading days ending on the trading day preceding the date the Company gives notice of conversion at its option, the closing price of the Company’s common stock exceeds 130% of the then-applicable conversion price. Dividends on the Convertible Preferred Stock are payable at the rate of 8.5% per annum, in either cash, common stock or a combination of both, at the option of the Company.
Under the Equity Commitment Letters, each Commitment Party has agreed to be subject to certain standstill provisions and not to transfer, hypothecate, sell or hedge the Convertible Preferred Stock, any common stock of the Company received upon conversion of the Convertible Preferred Stock, or its exposure to the common stock of the Company for a period of five years following the closing of the Merger, subject to certain exceptions.”
Let’s look closer at the Dow Chemical (DOW), Rohm & Haas (RHM) deal
First the video’s. Dow CEO Andrew Liveris on CNBC
Part 1:
Part 2:
Important things to note:
– Buffett wanted an investment in Dow Chemical BEFORE this deal came to the table after meeting Liveris and hearing about what is happening at Dow. – The $3 billion convertible Berkshire (BRK.A) converts in 5 years. – The deal, in keeping with Liveris’s stated acquisition criteria is accredive withing two years.
Rohm & Hass (ROH): Is the world’s largest producer of acrylic paint ingredients and also makes chemicals used in adhesives, packaging materials and personal-care products. Dow said the unit that will include Rohm & Haas’s business will have annual revenue of about $13 billion. Dow had $53.5 billion in sales last year.
The purchase will have pretax cost synergies of at least $800 million per year from increased purchasing power for raw materials, supply chain improvements and the elimination of redundant corporate services and governance, Dow said.
With the collective impact of these two deals, performance products and advanced materials will represent 69 percent of Dow’s total sales, on a 2007 pro forma basis, compared with 51 percent prior to these transactions. EDBITDA will change from 51% performance to 62%.
Debt to equity will remain under 40% after the deal. Note: Some of the proceed from the Kuwait deal will pay off initial debt used for the transaction so the 40% number is a post both transactions number. Dow has $1.6 billion in cash as of the last quarter and $9.5 billion coming. $4 billion will come from Berkshire and Kuwait meaning even without any additional pure (convertible aside) debt, Dow would retain $1 billion in cash on its books post deal.
Bottom line, Dow retains tremendous financial flexibility post deal. Look at it this way, do we really think Buffett would pony up $3 billion for a convertible that would convert flat or at a loss? Would he put up the cash of he thought the deal would cripple Dow or its earning power? Think about it… Clearly Buffett sees tremendous upside for both a Dow with and without Rohm & Hass.
“Berkshire’s (BRK.A) Warren Buffett has always said that “price is what you pay, value is what you get”. It is one of my personal favorites because it reminds us that the price of a stock and what you are getting for that price are not always commensurate. There are times you pay in excess of what you are receiving in value and times you pay far less.
This is one of those times.
I have no idea what the price of Dow’s stock will be in the future. I do know that, buying the stock at its current levels, yielding a growing 4.5% is a wise move long term. With earnings expectations above $3.50 for 2010 (the next expected trough), Dow currently sits at about 10 times those earnings. Should Liveris’s “well north” mean $3.90 a share or higher, then we have a 4.5% yielding company sitting at 8 to 9 times earnings…
All this does not take into account the endless possibilities of $9.5 billion coming into the bank this year….”
It would appear Warren agrees….
Now, much is being said today about the premium Dow is paying. Let’s look closer. The deal is only a 47.9% premium to Rohm and Haas 60-day average price and a 28.7% premium to its 2008 closing high. Liveris did point out the the share price of Rohm dropped 16% during the month the deal came together. If it had just stayed flat, the “premium wretching” we have been hearing about would be nil. With Rohm & Haas, Dow is now committing to industry trough (2010-2011) EPS of $4 a share, up 14% from the previous $3.50 a share announced earlier this year. Let’s not forget the EPS for the trough is an “in the bag” estimate, expect superior results.
Let’s look closer at the Dow Chemical (DOW), Rohm & Haas (RHM) deal
First the video’s. Dow CEO Andrew Liveris on CNBC
Part 1:
Part 2:
Important things to note:
– Buffett wanted an investment in Dow Chemical BEFORE this deal came to the table after meeting Liveris and hearing about what is happening at Dow. – The $3 billion convertible Berkshire (BRK.A) converts in 5 years. – The deal, in keeping with Liveris’s stated acquisition criteria is accredive withing two years.
Rohm & Hass (ROH): Is the world’s largest producer of acrylic paint ingredients and also makes chemicals used in adhesives, packaging materials and personal-care products. Dow said the unit that will include Rohm & Haas’s business will have annual revenue of about $13 billion. Dow had $53.5 billion in sales last year.
The purchase will have pretax cost synergies of at least $800 million per year from increased purchasing power for raw materials, supply chain improvements and the elimination of redundant corporate services and governance, Dow said.
With the collective impact of these two deals, performance products and advanced materials will represent 69 percent of Dow’s total sales, on a 2007 pro forma basis, compared with 51 percent prior to these transactions. EDBITDA will change from 51% performance to 62%.
Debt to equity will remain under 40% after the deal. Note: Some of the proceed from the Kuwait deal will pay off initial debt used for the transaction so the 40% number is a post both transactions number. Dow has $1.6 billion in cash as of the last quarter and $9.5 billion coming. $4 billion will come from Berkshire and Kuwait meaning even without any additional pure (convertible aside) debt, Dow would retain $1 billion in cash on its books post deal.
Bottom line, Dow retains tremendous financial flexibility post deal. Look at it this way, do we really think Buffett would pony up $3 billion for a convertible that would convert flat or at a loss? Would he put up the cash of he thought the deal would cripple Dow or its earning power? Think about it… Clearly Buffett sees tremendous upside for both a Dow with and without Rohm & Hass.
“Berkshire’s (BRK.A) Warren Buffett has always said that “price is what you pay, value is what you get”. It is one of my personal favorites because it reminds us that the price of a stock and what you are getting for that price are not always commensurate. There are times you pay in excess of what you are receiving in value and times you pay far less.
This is one of those times.
I have no idea what the price of Dow’s stock will be in the future. I do know that, buying the stock at its current levels, yielding a growing 4.5% is a wise move long term. With earnings expectations above $3.50 for 2010 (the next expected trough), Dow currently sits at about 10 times those earnings. Should Liveris’s “well north” mean $3.90 a share or higher, then we have a 4.5% yielding company sitting at 8 to 9 times earnings…
All this does not take into account the endless possibilities of $9.5 billion coming into the bank this year….”
It would appear Warren agrees….
Now, much is being said today about the premium Dow is paying. Let’s look closer. The deal is only a 47.9% premium to Rohm and Haas 60-day average price and a 28.7% premium to its 2008 closing high. Liveris did point out the the share price of Rohm dropped 16% during the month the deal came together. If it had just stayed flat, the “premium wretching” we have been hearing about would be nil. With Rohm & Haas, Dow is now committing to industry trough (2010-2011) EPS of $4 a share, up 14% from the previous $3.50 a share announced earlier this year. Let’s not forget the EPS for the trough is an “in the bag” estimate, expect superior results.
Berkshire’s (BRK.A) Warren Buffett finally sees the light!!!
Dow Chemical (DOW) said today that it has agreed to buy Rohm and Haas (ROH), the specialty chemical maker, for about $18.8 billion in cash with the help of Buffett.
Dow will pay $78 a share in cash, a 74 percent premium over Rohm and Haas’s closing price on Wednesday. Rohm and Haas will continue to do business under its own name, and it will maintain its headquarters in Philadelphia.
The new company will be the nation’s largest makers of specialty chemicals, and helps both companies gain scale at a time when commodities prices are still rising.
The deal is an all-cash one. In addition to debt financing from Citigroup (C), Merrill Lynch (MER) and Morgan Stanley (MS),Dow received an equity investment from Berkshire Hathaway and the Kuwait Investment Authority paid $3 billion and $1 billion respectively for convertible preferred securities.
“The acquisition of Rohm and Haas is a defining step in our transformational strategy to shape the ‘Dow of Tomorrow’ – a high value, diversified chemicals and materials company, creating the largest specialty chemicals company in the United States with a leading global position in performance products and advanced materials,” Andrew N. Liveris, Dow’s chairman and chief executive, said in a statement.
More on this later…
Disclosure (“none” means no position):long Dow,C, none
So the latest Dow Chemical (DOW) rumor has yet another JV with Saudi Aramco. Could it be true? You betcha….
Let’s go back to last years announcement of the JV to build factories at Ras Tanura on Saudi Arabia’s Persian Gulf coast. The plants are going to have the capacity to produce as much as 8 million tons of chemicals and plastics a year, using raw materials from nearby oil and natural gas plants at a cost of 1/10th the current market rate for oil gas.
Now it is being reported that Saudi Aramco and Dow plan to build a $26 billion petrochemicals complex in Saudi Arabia to take advantage of the world’s biggest oil reserves and meet rising demand for plastics. Aramco and Dow aim to raise about $18 billion from loans and bonds starting next year to finance the project, said a banker, who declined to be identified because the plan is private. Royal Bank of Scotland (RBS) and Riyad Bank will help raise 70 percent of the project’s cost, said Abdulaziz al-Judaimi, Aramco’s vice president for new business, declining to provide an amount.
So, should we believe it?
If you remember my recent interview with CEO Andrew Liveris I asked if the most prudent use of the upcoming proceeds from the Kuwait sale wasn’t “more petrochemical JV’s, share repurchases and dividend increases”. His answer? A succinct, “Yes”.
Now, the final amounts of the project may differ from $26 billion but the deal is in the works. Liveris has made no bones about his desire to expand his petrochemical business. Here is the important point. Dow is the company of choice for nations rich in raw materials to do business with. Saudi Arabia, Kuwait, Singapore, China, Brazil and Russia are all working with Dow on various projects and what is even better for Dow shareholders is that the scale of the projects is growing exponentially larger and the cash outlays on the part of Dow to finance the deals is negligible.
Once active, the JV’s are self financing and Dow simply receives and equity payment for its interest. Nice..
Looks for details in the next 30 days. Whatever the final number, it will be big
UPGRADES Atwood Oceanics (ATW)- Credit Suisse Underperform » Neutral Pier 1 Imports (PIR)- DA Davidson Neutral » Buy Spherion (SFN)- CL King Neutral » Strong Buy Greif (GEF)- Janney Mntgmy Scott Neutral » Buy Yahoo! (YHOO)- Canaccord Adams Sell » Hold Ameristar Casinos (ASCA)- Morgan Joseph Sell » Hold National Penn (NPBC)- Boenning & Scattergood Market Perform » Market Outperform Polo Ralph Lauren (RL)- Morgan Keegan Underperform » Mkt Perform NASDAQ (NDAQ)- Piper Jaffray Neutral » Buy Nelnet (NNI)- Friedman Billings Mkt Perform » Outperform Winn-Dixie Stores (WINN)- Friedman Billings Mkt Perform » Outperform Regal Entertainment (RGC)- BMO Capital Markets Market Perform » Outperform Atlas Pipeline (APL)- Citigroup Hold » Buy AT&T (T)- Bernstein Mkt Perform » Outperform Ashland (ASH)- JP Morgan Underweight » Neutral TIBCO Software (TIBX)- JP Morgan Neutral » Overweight A. Schulman (SHLM)- KeyBanc Capital Mkts Hold » Buy
DOWNGRADES Barrier Therapeutics (BTRX)- Roth Capital Buy » Hold Aurora Oil & Gas (AOG)- Jefferies & Co Hold » Underperform NY Comm Bancrp (NYB)- Citigroup Buy » Hold Syniverse Holdings (SVR)- Robert W. Baird Outperform » Neutral Arch Chemicals (ARJ)- Oppenheimer Outperform » Perform RPM Inc (RPM)- KeyBanc Capital Mkts Buy » Hold
UPGRADES Atwood Oceanics (ATW)- Credit Suisse Underperform » Neutral Pier 1 Imports (PIR)- DA Davidson Neutral » Buy Spherion (SFN)- CL King Neutral » Strong Buy Greif (GEF)- Janney Mntgmy Scott Neutral » Buy Yahoo! (YHOO)- Canaccord Adams Sell » Hold Ameristar Casinos (ASCA)- Morgan Joseph Sell » Hold National Penn (NPBC)- Boenning & Scattergood Market Perform » Market Outperform Polo Ralph Lauren (RL)- Morgan Keegan Underperform » Mkt Perform NASDAQ (NDAQ)- Piper Jaffray Neutral » Buy Nelnet (NNI)- Friedman Billings Mkt Perform » Outperform Winn-Dixie Stores (WINN)- Friedman Billings Mkt Perform » Outperform Regal Entertainment (RGC)- BMO Capital Markets Market Perform » Outperform Atlas Pipeline (APL)- Citigroup Hold » Buy AT&T (T)- Bernstein Mkt Perform » Outperform Ashland (ASH)- JP Morgan Underweight » Neutral TIBCO Software (TIBX)- JP Morgan Neutral » Overweight A. Schulman (SHLM)- KeyBanc Capital Mkts Hold » Buy
DOWNGRADES Barrier Therapeutics (BTRX)- Roth Capital Buy » Hold Aurora Oil & Gas (AOG)- Jefferies & Co Hold » Underperform NY Comm Bancrp (NYB)- Citigroup Buy » Hold Syniverse Holdings (SVR)- Robert W. Baird Outperform » Neutral Arch Chemicals (ARJ)- Oppenheimer Outperform » Perform RPM Inc (RPM)- KeyBanc Capital Mkts Buy » Hold
On another note, am I the only one who was really distracted by Fisher’s hands during his talks? It looked like they were fake and a puppeteer was controlling them.
The good news here is that the move is being done to “restore margins” and the previous 20% increases have stuck.
Watch CEO Andrew Liveris this morning on CNBC. He reinforces many of the same things we spoke about in my interview with him earlier this month.
Part 1:
Part 2:
Bottom line, Liveris is going to deliver earnings for shareholders in the long run. If that means he has to restrict supply and raise prices he will. If means he has to move production to nations that offer cheaper inputs for his products, he will (and is).
Short run, it will not be very pretty. You do not raise prices 35% to 45% on all product lines and reduce output in a month for any other reason than things are real tough. Liveris said as much in the CNBC interview when he said “we are fighting for our lives in the trenches right now”. Current estimates are for $.92 a share for Q2, do not expect that to be hit.
Perhaps it is me, but, Dow below $36 a share? Should it happen I will not be able to resist buying more. It has only hit that level twice since 2003, I will be buying.
What we are seeing simply is the result of years of Congressional neglect on energy coming home to roost. Congressional drilling bans, restrictions, refining permitting nightmares and the list goes on and on. It take 3.5 years to get a nuke plant approved in the US, a joke.
We have enough natural gas off our coasts to power us for generations but we are restricted from getting it. Want to save on oil? Lower the natural gas price so far below that of oil (by adding supply) and watch the millions of homes in the northeast that heat with oil, using over a thousand gallons each during a typical winter make the switch to natural gas to heat their homes.
Until that time, we are going to have to get used to higher prices for petroleum products, which, unfortunately cover a huge swath of the good we use daily.
The good news for Dow shareholders? Kuwait and Saudi JV’s. These price increases will stick and when production is moved to the Saudi and Kuwait facilities, Dow will be getting “the milk from the cow, not the farmer”. Essentially the equation enables Dow to get oil at below market prices and sell the finished good at market rates, expanding profits and margins. The other option, since input prices are lower, is keeping margins the same and sell finished good below market prices and capture share.
Either way, shareholders win big, eventually…
PS. On another note, how about Liveris standing there for not one but two interviews on CNBC today to announce the news? It was not some middle of the night press release followed by a “no comment” from management. Typical Liveris, “this is the deal and what we are doing about it” (quotes mine). You can count the number of CEO’s who do that on one hand.
For all his honesty and forthrightness regarding Dow, you would think more people would take what he says about the future of the company more seriously. No matter, either way, it will happen and by ignoring him, investors give me time to gobble up more shares, at a now rock solid 4.5% yield at sale prices….
First this: “Dow Building Solutions (DBS), a market-facing business unit of The Dow Chemical Company (DOW), announced that it has signed an agreement to acquire Stevens® Roofing Systems and Geomembrane Systems, a business of JPS Industries, Inc. Based in Holyoke, Mass., Stevens® Roofing Systems manufactures reinforced thermoplastic (TPO) commercial roofing systems, an area with significant growth potential that aligns well with Dow’s energy efficient building expertise. Pending the transaction close, Dow plans to operate the acquired business as Dow Roofing Systems LLC. Financial terms were not disclosed. Regulatory approval is not required, and the transaction is expected to close within 30 days.
Dow Building Solutions’ participation in the commercial construction market centers around creating energy efficient structures, including insulation, weatherization systems and exterior wall systems. Stevens® is an innovator and a recognized leader in TPO single-ply roofing systems for commercial and industrial applications. The planned acquisition adds Stevens®’ commercial roofing expertise to Dow’s building science know-how, insulation and polymer technology expertise to deliver comprehensive solutions in this rapidly-growing industry segment.”
Then this news: Special-Situations Hedge Fund Harbinger Capital Partners has taken a stake in Owens Corning (OC). Since late April, Harbinger has spent $57.46 million purchasing 2.6 million (almost 2%) shares of Owens Corning on the open market at prices ranging from $20.56 to $23.96 each.
Harbinger may be think that like Sherwin Williams (SWH), Owens Corning (OC) is very cheap based on its long term earning potential, its market share and brand recognition.
While the large “transformational deal” ($10 billion plus) most want is unlikely (and unwanted from this author’s perspective) Liveris did say the scores of smaller deals were likely. Owens, with a market cap of $3 billion would fit into that frame. With $9.5 billion coming in Q4 and the roughly $3 billion already in the bank. The deal is easily doable.
Now, OC has put it asbestos litigation behind it and has successfully transformed it earnings profile to 60% international with it composites purchase recently. Both the composite, fiberglass insulation and roofing businesses do have some symbiosis with Dow businesses so cost savings would be available. It would also immediately vault Dow Building Solutions into a market leader.
The best part? The price. Like everything that has anything to do with housing or any kind, Owens share price has been hit, down 30% over the past year. Andrew Liveris, is, a value investor. He is also the best kind, a patient one. Owens right now represents value and more earnings diversification for the company. It also, now, finally, represents and international presence.
By the end of the year about 1/3 of Dow’s market cap will be cash. Expect buybacks and dividend increases and small purchases. Owens is larger than “small” but still could easily work.
