Tag: dow

There has been a ton of speculation as to what Dow Chemical (DOW) was going to do with the $9.5 billion it is getting from Kuwait in the recent JV agreement.

Some backround:
On 12/7 I wrote “How about using the very same strategy they have been using for the past year? Selling chunk of this business to outsiders and placing them into the Joint Venture (JV) category. This would provide Dow billions of dollars instantly to be deployed in buying some specialty chemical makers without impairing the balance sheet.”

A week later Dow announced it has sold 5 of those very commodity businesses into a new JV with Kuwait and would receive $9.5 billion for them AND still receive a 50/50 split of the businesses results.

Where is the money going?

Dow Chemical plans to invest $5 billion in China in the coming 10 years, said CEO Andrew N. Liveris in Shanghai yesterday. The $5 billion fund budget will not cover a potential coal-to-chemical project in central China’s Shaanxi Province, where the chemical giant is conducting a feasibility with Shenhua Group Corp, the world’s second largest coal producer, added Liveris.

Now that is has signed the agreement with KPC (Kuwait Petroleum Corp.) Dow is in talks with Sinopec (SHI) to take over stake in the refiner’s $5 billion joint venture oil refinery and petrochemical project with Kuwait Petroleum Corp in East China’s Guangdong province.

China welcomes chemical producers from Kuwait and Saudi Arabia because they are able to provide crude oil to the country’s large petrochemical projects, said Wang Jin, an analyst at Orient Securities recently.

Dow is on a path to be the world’s dominant petrochemical producer. Early this year CEO Andrew Liveris called 2007 “a transformational year”. He has delivered.

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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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Why does Wall St. keep selling shares of Sherwin Williams (SHW) in the face of its continued increasing and then beating its earnings guidance?

Sherwin-Williams said at the Citi Basic Materials Symposium it continues to expect 2007 earnings of $4.70 to $4.75 per share. The current consensus earnings estimate is $4.73 per share.

It is hard to quantify what is more confusing. The lack of support from investors or the lack of interest from a suitor. Sherwin is cheap and growing.

My hope is that Andrew Liveris at Dow Chemical (DOW) is reading this and takes a look at the company. Sherwin has everything Liveris has specified he wants in an acquisition.
It is growing earnings despite a negative operating environment, Liveris could do the deal without substantially adding to Dow’s debt, the acquisition would be immediately accredive to earnings and it would add substantially to the specialty coatings business he has said he want to develop further.

In short, there is nothing about the deal not to like for Dow, unless, unless that is they are working on something much larger…

Either way, Sherwin shares are going to surge when either Wall St. notices it or a potential buyer does. There are going to be a bunch of folks sitting around not too long from now saying, “I wish I had bought back then…”

We did, don’t worry, we will console you….

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Now that I have had time to digest Dow Chemical’s (DOW) move on Wednesday, something just keeps popping up in my head.

Have you ever done a reorganization of your home or even a room in it? What is the first thing you do? Get rid of the stuff you really do not use that much or need anymore. This is what I just cannot get past with Dow.

After about a year of predicting CEO Andrew Liveris had no major acquisition or merger plans, I think I am changing my tune.

Now, Dow just reduced its workforce by 2.3% and will save $180 million a year with the businesses it is shuttering. More importantly, they have also freed up millions in capital to be deployed elsewhere more profitably. This is where it gets good.

Liveris and Dow have made no secret of divesting away from the cyclicality of their commodities business. What would be the most effective way of doing it? How about using the very same strategy they have been using for the past year? Selling chunk of this business to outsiders and placing them into the Joint Venture (JV) category.
This would provide Dow billions of dollars instantly to be deployed in buying some specialty chemical makers without impairing the balance sheet (another Liveris prerequisite for any acquisition). Without having to use debt or stock to make a major purchase, it would also settle nicely into Liveris requirement of being accredive to earnings.

It also would allow Dow to benefit from the commodities business through the JV’s. while an erratic business, it is still very profitable when it earnings are on the upswing.

Who would buy the commodity business? There are a host of developing nations (Asia, Middle East & South America) that Dow already has JV’s with that would love to have the businesses if for no other reason than to secure a supply of the primary product they produce, plastics.

Do I think Liveris has a “for sale” sign on the company? No. I do think he is in the process of positioning it to make a major move very soon.

I expect the commodity sale into a JV to be announced after the new year and a merger or major purchase to be announced at the latest by the end of February.

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Dow Chemical (DOW) CEO Andrew Liveris has stated the goal of ridding Dow of marginally profitable businesses to focus the company on its specialty ones.

Liveris said “Today’s announcement reflects our commitment to prune businesses that are not delivering appropriate value and tackle tasks more efficiently across the entire organization … freeing up capital and resources that will be re-directed toward value-creating growth opportunities”

He continued, “Our focus on financial discipline and low cost to serve remains as sharp as ever, and we will continue to seek ways to refine our organizational structure, asset base and business portfolio to ensure Dow’s competitiveness on the world stage.”

The moves, which will result in a Q4 cash expenditures of $150 million include:

º Due to overcapacity within the industry, a disadvantaged cost position, and increasing pressure from generic suppliers, the Company will record an impairment charge related to its agricultural products manufacturing site located in Lauterbourg, France. As required, the Company has launched an information/consultation process with local employee representatives on the closure project.

º The Company has assessed the long-term profitability of its participation in the automotive sealers business and has determined that the projected results are inconsistent with the financial performance expected of a market-facing business. As a result, the Company will exit the automotive sealers business in North America, Asia Pacific and Latin America within the next 9 to 18 months, and will explore strategic options within Europe.

º The Company will write down its investment in a joint venture – Petromont and Company, Limited Partnership – due to an unfavorable financial outlook, reflecting significant long-term economic challenges.

º The Company has evaluated the economic and financial feasibility of its styrene plant in Camaçari, Brazil, and due to raw material competitiveness, the age of the facility, as well as the ready availability of styrene within the global marketplace, the Company will recognize an impairment charge related to this facility.

º The Company will close its hydroxyethyl cellulose manufacturing facility located in Aratu, Brazil, due to a number of factors, including capacity limitations, high structural and raw material costs, and older technology. After studying several options to improve the profitability of the facility, the Company decided to close the plant during the first quarter of 2008.

º Due to a number of factors, including the inability to secure a source of economically sustainable propylene and the use of older technologies at the plant, Union Carbide Corporation (a wholly owned subsidiary of Dow) has decided to shut down the polypropylene facility at St. Charles Operations in Hahnville, Louisiana, by the end of 2007.

The total charges including the above expenditures are expected to be $500 to $600 million. If all the charges are taken in Q4, the total comes to about 62 cents a share. Dow will save about $180 million a year from the moves. While not a huge number, the real advantage for shareholders here is the availability of cash for other uses. The move will allow Dow to now redirect millions of dollars into operations whose return on that investment is far higher than those bring shuttered. Other use could include dividend increases or additional share repurchases.

All in all this is a rather mundane event as far as earnings go but its importance is in Dow still delivering on the ambitious goals it is setting for itself.

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The potential here is just stunning for Dow (DOW).

Russian natural gas monopoly OAO Gazprom and Dow signed a memorandum of understanding that outlines potential cooperation on projects in Russia and Germany. Gazprom said the companies will consider creating a joint venture based on Dow’s new petrochemical facilities in Germany and cooperating in refining gas from Russia’s Yamalo-Nemets autonomous district, and study other possibilities.

CEO Andrew Liveris has long lamented high natural gas prices and the US policy (or lack thereof) has lead to the expedited JV strategy at Dow over the past two years.

Some backround here is now necessary. In late October Gazprom announced an agreement with Statoilhydro.

From the Release:
“The Shtokman gas and condensate field is located in the central part of the Russian sector of the Barents Sea offshore.

Approved by the RF Nature Ministry’s State Commission for Mineral Resources in January 2006, Shtokman’s C1+C2 reserves make up 3.7 tcm of gas and over 31 mln t of gas condensate.

In October 2006, the Gazprom Management Committee decided that pipeline gas deliveries from the Shtokman field to the European market would take priority over LNG shipments. Shtokman was identified as the resource base for Russian gas export to Europe via the Nord Stream Gas pipeline.

Phase 1 stipulates production of 23.7 bcm of natural gas per annum, gas and LNG supplies via the gas pipeline will start in 2013 and 2014, respectively.”

A massive deal, but what to so with it all.

Fast forward To Dow and Gazprom:

The potential JV would give Gazprom access to new petrochemical facilities set up by Dow in Germany. In return Dow would refine gas at Gazprom’s fields in the Yamalo-Nemets region in the north of Russia. Essentially Dow would have the inside track in building the Russian petrochemical industry. This follows similar deals for Dow in both Saudi Arabia and China.

See where this is going?

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I think it is only a matter of time before someone makes a play for my favorite paint company and my guess will be that a chemical company, looking to expand it coatings business will be the suitor.

Let’s look at Sherwin (SHW). In the Q3 that ended Sept. 30. Sales increased 4% and EPS increased a whopping 19%. The profit surge came from two events, both of which are excellent signs for shareholders. Higher margins on price increases and cost controls illustrate demand for their products is still strong and that the company is using the current slow period to maintain efficiency. A 6% lower share count during the period means Sherwin is directing cash flow into buying its own shares, which increase shareholders ownership of earnings. YTD the company has retired 10 million shares and just got approval to repurchase another 20 million, or more than 14% of Sherwin’s remaining shares.

Investors currently will pay 12.7 times this year’s earnings, a discount of 20%-30% to the S&P 500. This year’s and next year’s earnings forecasts suggest a long-term growth of around 10% minimum, about what the broad market typically delivers meaning shares could increase that amount (20% to 30%) and then be “fairly valued” to the market.

As a takeover target and not an investment, Sherwin looks just as, if not more attractive. It has an EV (enterprise value)/Ebitda ratio of 7. Great, but what does that mean? . It’s the cost to buy all the outstanding shares and retire its debt, while using its available cash toward the purchase. Ebitda stands for earnings before interest, taxes, depreciation and amortization. It’s used to gauge essentially earnings from operations. So think of EV/Ebitda as the ratio of a company’s takeover price to its earnings potential. What does Sherwin’s ratio of 7 mean? It is currently valued about 30% below the median for the S&P 500. A bargain.

Sherwin produces about $800 million in cash flow from operations and produces almost $600 million in net income each year.

Who then? Sherwin has a market cap of $7.5 billion making any of the chemical majors a potential buyer. Dow Chemical (DOW) as I have written several times is the most likely but DuPont (DD) and BASF (BASF) are just as capable

Dow CEO Andrew Liveris has said any potential acquisition must be accredive and a Dow purchase of Sherwin would be just that, and best of all it could be had at a bargain.

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Did not see this one coming but that does not mean it is a bad thing…

Archer Daniels Midland (ADM), the world’s largest biofuel producer has formed an industrial chemicals group with a focus on exponentially increasing ADM’s presence in industrial markets. The new business will take advantage of ADM’s processing expertise and global distribution network to expand ADM’s product offerings in industrial chemicals. The goal is for ADM to commercialize additional chemicals from renewable feedstocks.

“Renewable, biobased industrial chemicals fit into two major trends that we’re seeing in the marketplace: the desire to improve a product’s environmental footprint and the desire to reduce the use of petroleum-based products. In the short-term, we see opportunity to commercialize direct replacements for typically petroleum-derived chemicals. And in the longer-term, we see even more opportunities to develop new chemicals which provide increased functionality and are better for the environment. As one of the world’s largest processors of renewable feedstocks, ADM has a unique opportunity to succeed in this area,” said John Rice, executive vice president, Commercial and Production.

Interesting Hire:
To head the new business, ADM has hired Janet Mann as general manager, Industrial Chemicals, reporting to Rice. Mann joins ADM from Chemtura (CEM) where she was vice president and general manager, Performance Specialties. Mann previously served as business director for Dow Chemical (DOW) and executive vice president of Dow’s ANGUS Chemical subsidiary. She received a Master of Business Administration degree in finance from DePaul University and a Bachelor of Science degree in chemistry from Bradley University.

“The demand for biobased solutions is growing rapidly in the industrial segment. ADM has the assets and knowledge to commercialize many chemicals from renewable agricultural feedstocks, and I am very excited to join the team,” said Mann.

“Janet brings a deep understanding of the chemical and plastics industry to the ADM team. She has expertise in developing and implementing successful business strategies focused on growth in the chemical industry,” said Rice.

Now, two weeks ago I blogged on what Dow would find attractive in Chemtura’s portfolio and this move may be a sign that Mann is getting out before Dow takes over the specialties business there. Stay tuned…

As for ADM, this is great because it is opening yet another bio-based market for its products. Currently the leader is bio-fuels and bio-plastics, ADM now will enter the bio-chemicals arena. Any “bio” is a sure winner today and ADM is the first and largest player in that market. It will muddle the field for investors though. How will we value ADM? Is is a Ag Company? Energy? Specialty Chemical? What? The answer will be determined by the composition of earnings. One thing is for sure. They cannot be just lumped in with ethanol producers or food processors anymore. That valuation inadequacy will provide great opportunities at times so be both opportunistic when it is mis-valued and do not despair when the like happens.

They are entering a category of one here and that almost always is a very good place to be.

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Some very interesting things were discussed on the earnings call Thursday that, if you were disappointed over the earnings release earlier in the day, would have fixed that.

Dow Chemical (DOW) still is tied to its cyclical commodities business to a point and its transformation has been centered on getting away from that. Estimates for the next “trough” in the commodity business put EPS between $2 and $3 a share. CEO Liveris said on the call that “our confidence is increasing” that Dow would be at the top of that range and when pressed about beating the $3 ($3.50 was the number thrown out), they were of course non-committal but at the same time did nothing to dispel that thought. As many investors know, it is not what is said but what is not said at times that is more meaningful. This is important because it now means that when Dow’s earnings are at their lowest shares will then trade for about 14 times earnings at today’s prices vs the nearly 28 times that was estimated earlier in the year. The importance of this cannot be emphasized enough as it then means the “peak” will then be that much better.

To date Dow has repurchased 25 million shares or 2.6% of outstanding shares. Not insignificant but also not an impressive amount. The dividend was increased 12% in June and sits at 3.8% which is very nice and very safe.

Cash flow remains strong and this is a function of the JV strategy that is a self funding one, meaning the revenues from various ventures fund that costs of current and additional ones.

JV’s while off for the quarter have produced earnings to date of about $825 million vs $700 million at this time last year.

The constant “transformational event” chatter was addressed. Regarding the postponed meeting in November Liveris said, “when we do decide to have a meeting, you’ll hear alot from us”. There was a very interesting back and forth with an analyst that went like this:

Frank Mitsch – BB&T

Now Andrew, a couple of weeks ago we saw major volatility in the share price surrounding the decision to postpone your analyst meeting. Could you expand upon the reasons why you decided to do that?

Andrew Liveris

Well, just like the Red Sox are in the World Series again Frank — I assume that’s why you’re congratulating Kathy — we’re playing our own World Series here and lots of people are wondering what inning we’re in. I would tell you that the Dow Chemical Company has got lots of opportunities out there.

To Dave’s question, we just don’t want to have a premature event. We don’t want to have a meeting for the sake of having a meeting. When we have a meeting, we want to be able to tell you a lot about where we are on certain of our transactions. That doesn’t mean it’s an imminent one, it just means that with a lot of things going on, it just says that we didn’t think the timing was right.

We gave some notice when we first put the data out there, we said tentative. Then we were pretty much toying with the idea of December and we said, well, let’s just wait a little bit. I would tell you that we are very active and will stay very active. But when we have a meeting, you’ll hear a lot from us.

Frank Mitsch – BB&T

It almost begs the question on how imminent the transactions will be because it does appear that you are targeting early next year. So I think some of the speculation is probably not all that off base in terms of an imminent transaction. With that said, assuming that you’re the buyer, how much dilution and for how long would you tolerate any significant transformational transaction?

Andrew Liveris

I guess I’ll give you two quick answers. One, no comment on accretion or dilution other than our whole M&A discipline is around accretion and doing the right deals for the right reasons, and we’ve been very consistent on that. Maybe the other answer, if I can be so bold, talk to me when the Red Sox win the World Series.

Frank Mitsch – BB&T

So we’re going to have to wait another 84 years?

Geoffery Merszei

Frank, let me just add on to what Andrew just said. We have been having regular dialogue with the sell side, as well as with the buy side analysts, and we’ve been listening to all of you. The bottom line is that everyone basically agrees that when we have a meeting like this, we shouldn’t have a meeting just because it’s on the calendar every three years, but we should have it at a time when it makes a lot of sense in terms of having a fruitful dialogue and to make sure that it’s an efficient use of everyone’s time. So we have been listening, and that is really truly the driver for having it at the right time.

Frank Mitsch – BB&T

Are we looking at some time in the latter part of the first quarter?

Andrew Liveris

In terms of the meeting? Is that the question?

Frank Mitsch – BB&T

Yes.

Andrew Liveris

Probably. I would say it that way, but we will not give you a firm date. But trust us, we’re listening, as Geoffery said. Our buy side, our sell side, all of you matter to us and we’re going to really time it so it’s the right time. I don’t want to be waiting a year for it, how’s that? I’ll give you an out of bound.

Could he say more without saying anything?

Liveris did say of a potential “partner”, “Whatever a new entity looks like, let’s call it a joint venture, will have to be a growth company…not just a consolidation play, not just an exit strategy, not a leverage play but a growth company. Secondly, it has to preserve Dow Chemical’s integration, particularly in its performance plastics and chemicals businesses, and provide a petrochemical “cracker” that can support the company’s broad portfolio.”

He finished by saying, “A strategic partner…is almost certainly going to have access to feedstocks somewhere in the world, notably the Middle East, but not just there,” Liveris said. “They are going to be able to provide us those feedstocks on an ongoing basis, not just on one project.”

One can almost only determine that something is in the works and it will be quit big. It is not a question of me reading what I want to here into the comments either because if you have read my commentary of Dow, a huge event is not something I have been stumping for.

Liveris did say to the analyst in the “transformational event discussion: “talk to me when the Red Sox win the World Series”. Okay Andrew, I will be in touch next week.

Bottom line is Dow is a long term ValuePlay, that means that there will be quarters like this but as long as the long term focus and fundamentals remain intact, we look past it, pick up more shares if they drop and hold on.

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