A press release hit the wires a few minutes ago that ought to make people look again at the inflations meme.
The Dow Chemical Company (NYSE:DOW) announced today that it will increase the off schedule prices for Acrylic Monomers in North America and Latin America, effective July 1, 2009, or as contracts allow. The increases are $0.10/lb or $220/MT for Acrylates, Methacrylates and Specialty Monomers.
The company also announced it will increase the off schedule prices in Europe and Asia for Acrylates, Methacrylates and Specialty Monomers by $0.3/lb or $70/MT, effective July 1, 2009.
These increases are necessitated by the continuous cost escalation of key raw materials used to manufacture monomer products.
Now Dow is a “building blocks” company. In its simplest terms, they make the stuff people use all over the world to make stuff we use. If they are increasing prices, then those prices either:
1- Get absorbed by the companies buying their chemicals, causing profits to fall or: 2- Get passed onto to end users (us) causing consumer prices to rise
We have been told repeatedly that inflation will not be a problem. Yet, we are beginning to see anecdotal evidence that it is brewing. Admittedly these are not widespread price increases but they are price increases that effect scores of industries.
After speaking with people familiar with Dow’s direction, it appears an outright sale of Dow Ag is becoming more remote by the day. What is more often being discussed is a partial sale into a JV or a partial IPO. Either of these scenario’s would be acceptable and in all reality, were Dow to IPO part of it and give existing shareholders first crack at pre-IPO pricing, that would be something I would be very interested in.
In press release lingo, “increased flexibility” translates to “we do not have to dump this asset if we don’t get 100% of what we want”. I’m starting to calm down over this whole thing now…
From the Release:
The Dow Chemical Company (NYSE: DOW) announced today that it has signed two separate sale agreements totaling in excess of $900 million as part of its de-leveraging plan designed to pay down debt, preserve financial flexibility, streamline its portfolio and improve cash flow. Sales of non-strategic assets announced so far this year now total in excess of $2.6 billion, well ahead of the Company’s original divestment plan.
The Company announced that it has signed an agreement to sell its Calcium Chloride business to a strategic chemical industry buyer for a value in excess of $210 million. At the closing of the transaction, employees of the Calcium Chloride business will transition to the buyer’s business. In addition, the Company announced a definitive agreement for the sale by Dow Europe GbmH and Dow Benelux BV of their interests in Total Raffinaderij Nederland N.V. (TRN), Dow’s joint venture with Total S.A., to Valero Energy Corporation (NYSE: VLO) for an enterprise value expected to be approximately $725 million.
“These asset sales at valuations that result in significant de-leveraging represent another major step in the acceleration of Dow’s divestiture and de-levering plans despite a challenging economic environment,” said Andrew N. Liveris, Chairman and CEO of Dow. “We are delivering on our commitments ahead of schedule and creating the momentum needed to strengthen our financial position and create a faster path to earnings growth.”
The transaction for the Calcium Chloride business will include the calcium chloride assets associated with Dow’s Ludington, Michigan operations; Dow-owned calcium chloride terminals; and the nationally-known brands PELADOW™ premium ice-melt, LIQUIDOW™ calcium chloride solution, COMBOTHERM™ blended deicer, BRINER’S CHOICE™ calcium chloride, and DOWFLAKE™ Xtra calcium chloride flake. The transaction is subject to customary closing conditions, including regulatory approvals, and is expected to close by the end of June 2009.
Dow chemical (DOW) has given an update on the bridge loan it used to pay for the Rohm & Haas deal and changed the rhetoric on the possible Dow Ag sale.
At the recent annual meeting of shareholders CEO Andrew Liveris said Dow’s focus through the end of the year will be to pay down the bridge loan and deleverage the company, run the business effectively and integrate Rohm and Haas to begin growing once again.
Originally, Dow had planned have the Rohm purchase bridge loan of $9.5 billion down to a balance of $4.2 billion in 90 days. As of last Thursday the loan is now down to $3 billion, meaning $1.2 billion additional has been paid off 55 days ahead of schedule according to the company.
Dow said it continues to look at its options to sell units. In addition to over $3 billion from the sale of Morton Salt, TRN, Calcium Chloride and other units, Dow is considering raising $4 billion to $6 billion from businesses in a successor to the K-Dow Petrochemicals deal or regional agreements; $1 to $2 billion from aromatics and derivatives.
Liveris repeated the company position that AgroSciences is a growth unit that is valuable to Dow, and would only be sold if a full-value offer is made ($15 billion). they also gave the usual boilerplate disclaimer that they are “still assessing its options” to keep the business, create a joint venture or sell it outright. This is a slightly harder line on the unit that when the original announcement was made that “all options are on the table”. At that time there was very little talk of price for the unit and it was stated that there were “several” interested parties.
I don’t think it is a great leap to assume those parties perhaps assumed they could pick up an incredibly valuable asset on the cheap from a distressed seller. I think it is also the reason not long after we saw both the equity and debt offerings and no additional mention of a DowAg sale. If the above is true, then Liveris does deserve kudos for not dumping the unit and holding firm on price. All that being said, even a full value sale of it is unacceptable.
The joint venture makes sense and since they already have one with Monsanto (MON), they would be a powerful partner. It would aid in cost reductions/capex and produce the clear industry powerhouse. what would remain would be looking at the composition of it.
Dow also announced today that it will increase the off schedule price in all regions for the product lines of both Acrylic Monomers and Vinyl Acetate Monomers effective June 1, 2009, or as contracts allow. The increases are $0.03/lb or $66/MT for Acrylates and Vinyl Acetate Monomers and $0.04/lb or $88 MT for Methacrylate and Specialty Monomers. This too is good news as price increases do mean some demand is coming back into the system.
Now, it is only 1 increase and we need to see if it sticks and if other products follow suit. Never the less, it is good news.
Disclosure (“none” means no position):Long Dow, none
Let’s do the math, $8.25 billion raised in a week (through debt and equity offerings). No Dow Ag sale and the stock is up 16% from this week’s lows. Can we put the talk of selling it to bed forever now?
The release:
The Dow Chemical Company (NYSE: DOW – News) today announced that on May 7, it priced a $6 billion underwritten public offering of debt securities, including $1.75 billion aggregate principal amount of 7.6% notes due 2014; $3.25 billion aggregate principal amount of 8.55% notes due 2019; and $1 billion aggregate principal amount of 9.4% notes due 2039.
Of the $6 billion in notes to be offered, $1.35 billion aggregate principal amount of the 8.55% notes due 2019 will be offered by accounts and funds managed by Paulson & Co. and trusts created by members of the Haas Family. These investors received notes from Dow in payment for 1.31 million shares of Dow’s Perpetual Preferred Stock, Series B, at par plus accrued dividends. Dow will not receive any of the proceeds from the sale of notes by the selling noteholders.
Dow intends to use the net proceeds received from the offering for refinancings, renewals, replacements and refunding of outstanding indebtedness, including repayment of a portion of the Company’s term loan borrowings.
Together with the common stock offering which priced on May 6, the over-allotment option which was exercised on May 7, and upon consummation of this debt offering, Dow will retire all remaining Perpetual Preferred Stock, Series B from the Company’s capital structure. Eliminating these shares is immediately and significantly accretive to net income available for common shareholders. Dow will not receive any of the proceeds from the exercise of the over-allotment option.
“Today, we announced yet another oversubscribed offering – the second one this week,” said Andrew N. Liveris, Chairman and Chief Executive Officer. “Coming on the heels of a very successful equity issuance, this bond offering clearly shows investor confidence in the Company’s strategic direction and our ability to generate significant value over the long-run. And with a substantial amount of proceeds going to pay down our term bridge loan well ahead of our plan, this is further evidence of the Company’s commitment to financial flexibility and maintaining an investment grade rating. The success of our equity and debt issuances this week also allows us to make the right decisions for our shareholders on the assets we will dispose of, the timing of these dispositions, and their valuations.”
Still no need to sell Dow Ag. Liveris is correct in saying that at $15, as constituted and with plan to rid itself of many of their commodity businesses, shares are a good value. That being said, the the current constitution is drastically altered, that may not be the case.
The Dow Chemical Company (NYSE: DOW) announced today that on May 6 it priced a public offering of approximately 130 million shares of its common stock at a price to the public of $15.00 per share.
Total potential gross proceeds to Dow and the selling stockholders from the offering is approximately $2.25 billion, including an over-allotment option of 15 percent.
Of these shares, approximately $1 billion in gross proceeds will be through shares offered by Dow and $1.25 billion (including over-allotment shares) will be through shares offered by accounts and funds managed by Paulson & Co. and trusts created by members of the Haas Family.
Excluding the over-allotment option, the Haas Trusts and the Paulson funds are each selling $454.4 million of their shares of Dow’s Perpetual Preferred Stock, Series B to Dow for the shares being sold by them in the offering.
“This over-subscribed equity issuance, and the clearing price of fifteen dollars per share, shows the strength of the Dow name in the equity markets,” said Andrew N. Liveris, Chairman and Chief Executive Officer. “In addition, by retiring more than $900 million of perpetual preferred in our capital structure, we have created a significant de-leveraging event that at the same time is meaningfully accretive to common shareholders.”
The clearing price represents a 1.3 percent decline from the closing price on May 6 of $15.19, and an 8.1 percent decrease from the closing price on Tuesday, May 5 of $16.33.
At its current market cap, True is valued at just under 1 times 2009 sales and just over 1 times 2008’s. Too low.
What if the recession deepens and profits actually fall? Say they fall 10%? Will the stock then trade for 5 times those earnings? Or is it likely the current price reflects a general feeling profits may fall more than currently projected and any shortfall in results will be met with a stagnant share price? Who knows but my impression is that the latter is most likely.
Think about it. If you owned the company outright and someone offered you $8.62 for it ($11 share price – the $2.38 per share you have in the company’s bank account) would you take it or tell the potential buyer where to stick it? Me too. Now reverse it. If someone owned it and offered the company for $11 and included in the price was the $2.38 in the bank would you jump at it? Me too.
Today True released results:
Net sales for the first quarter increased 19.1% to $63.6 million compared to $53.4 million in the first quarter of 2008. Growth within our consumer direct and international businesses was partially offset by a decline in our US wholesale business. Gross profit grew 27% to $38.7 million or 60.9% of net sales from $30.5 million or 57.1% of net sales in the first quarter of 2008.
Our gross margin benefitted from the ongoing segment mix shifts towards our higher margin consumer direct business and the increase in our international segment’s gross margin. This was partially offset by the planned decline in our outlet stores gross margin.
And:
Operating income for the first quarter increased 15.0% to $13.1 million or 20.5% of net sales compared to $11.4 million or 21.2% of net sales in the prior year period. The year-over-year reduction in operating margin was primarily driven by the decrease in our consumer direct segment’s operating margins.
Turning now to our segment information, within our US wholesale segment, sales for the first quarter decreased 11.0% to $28.9 million versus $32.5 million in the prior year period. The decrease in the US wholesale segment’s net sales is due to a decline in sales boutiques and majors partially offset by an increase in sales to outside customers. Michael will expand on these trends in his comments.
International sales in the first quarter increased 26.0% to $11.2 million from $8.9 million in the prior year period. The year-over-year increase is primarily due to increased sales of Japan as well as increased sales to our European and North American distributors.
Consumer direct net sales which include our branded retail stores and e-commerce site increased 95.8% during the first quarter to $23.1 million from $11.8 million in the prior year period. The growth in our consumer direct segment is attributable to the expansion of our retail stores which totaled 49 at the end of the first quarter of 2009 compared to 18 retail stores at the end of the first quarter of 2008. Our total square footage at the end of the first quarter was 88,700 square feet compared to 31,900 total square feet at the end of the first quarter of 2008.
Nothing short of fantastic….
For the rest of the year:
While it is still early in the year, we are optimistic that the earnings from these favorable trends will offset the impact as the increase in the effective tax rate and the stock-based compensation accounting method change. Therefore, we continue to expect that the company’s 2009 earnings per share will be between $1.73 and $1.81 per share with an encouraging outlook, thanks to the improved sales order trends.
Now it trades at $20 a share or 11 times the low end of their estimates. Cash per share has risen to $2.92 and debt remains a non issue.
Did I buy some back then? No. Am I kicking myself? Yes. Is there a natural instinct to go buy some today because of the this missed chance? Yes. Will I? No. Before you do something rash when investing, stop, take a breath and look at what you did do.
What did I buy instead of True? In the Feb/March time frame I bought General Growth Properties (GGWPQ) (avg. $.49/today $1.02), RHI Enterntainment (RHIE)(avg. $2.02/today $3.44), Dow Chemical (DOW) (avg. $7.25/today $15).
Note: Dow Chemical shares have been owned for years and avg. cost for all shares is different, the cost referenced reflect just those shares bought in the mentioned time period for comparison.
So on an apples to apples comparison, we are doing just fine. Am I still upset that the cash I have sitting in the account was not put to use in True? Yup. But, looking back at what I did do diminishes that angst and DOES give me confidence that I am finding great value picks out there, even if I do not always pull the trigger for whatever reason.
Should we get the sell-off I expect, the chance of me letting this one slip away again are pretty slim…
The Dow Chemical Company (NYSE: DOW) announced today it has commenced a public offering of the Company’s common stock in which it will raise approximately $1.625 billion of capital.
Of the total capital raised, approximately $1 billion will be through shares offered by the Company and approximately $625 million will be through shares offered by accounts and funds managed by Paulson & Co. and trusts created by members of the Haas Family. These investors have agreed to sell a portion of their shares of Dow’s Perpetual Preferred Stock, Series B to Dow at par plus accrued dividends for shares of common stock which are subsequently being sold in the offering.
The selling stockholders have granted the underwriters a 30-day option to purchase an additional number of shares equal to 15 percent of the total number of shares offered to cover over-allotments.
Dow intends to use the $1 billion of proceeds it will receive from the offering to repay a portion of its $9.2 billion term loan agreement borrowings, under which it used to pay a portion of the purchase price for its recent acquisition of Rohm and Haas Company.
“Today’s offering will not only strengthen our balance sheet and improve our financial flexibility, but it is also very consistent with the objectives of our de-leveraging plan, which is designed to pay off our bridge financing facility by the end of this year,” said Andrew N. Liveris, Dow’s chairman and chief executive officer.
In addition to the equity offering, Dow is also considering a potential benchmark offering of senior unsecured notes in a registered public offering, subject to market conditions. The Company stressed that the consummation of the common stock offering is not conditioned upon the concurrent completion of the senior notes offering, and vice versa.
Dow did a fantastic job in Q1 managing the business and then dropped what I consider a bombshell on investors..
First the news (projections were for a $.20 LOSS):
· Earnings were $0.03 per share, or $0.12 per share excluding certain items(1), as cost control actions and price/volume management mitigated the effects from the worst global recession in decades.
· Agricultural Sciences set quarterly records for both sales and EBIT(2). Sales for the segment increased 10 percent on a year-over-year basis, reflecting a 10 percent increase in volume.
· Purchased feedstock and energy costs were down 49 percent compared with the same quarter last year, contributing to a 20 percent decline in selling prices, with the majority of the decline in the Basics segments.
· EBIT excluding certain items improved sequentially, with the largest percentage improvement coming from the Performance segments, above and beyond the seasonality of Agricultural Sciences.
· Rapid actions to reduce operating costs in the quarter resulted in a decrease in spending of $270 million year over year and sequentially. Capital spending was down 35 percent in the quarter, in line with the Company’s pre-acquisition 2009 capital spending commitment of $1.1 billion.
“There are some signs that the pace of global economic decline is moderating. The broad diversity of Dow’s product mix enables us to have better visibility on true market demand, especially in parts of the world, such as in China, where domestic stimulus programs are beginning to take hold.
“Having said that, it’s prudent to expect that 2009 will still be a recessionary year globally, and we are not counting on material improvements in economic conditions in the near term. We remain focused on managing what is in our control, namely reducing costs and capital spending, delivering on our action plan to de-leverage our balance sheet, and smoothly and successfully integrating Rohm and Haas into the new Dow. These actions are paramount to our long-term strategy to transform Dow into an earnings-growth company.”
The bombshell? DowAgro Sciences may be sold or divested in an IPO. This is unacceptable under any circumstances. Dow Ag, as CEO Andrew Liveris told me is the crown jewel of the company.
Q1 would have experienced a large loss were it not for Dow AG. It is the only segment of the company growing (11 straight quarters) and still has a blockbuster product, Smartstax coming online either late next year or next. In other words, the best for Dow Ag is still to come.
The options given were and IPO, or a outright sale. Either option is a slap in the face to investors who have stuck by the company through its recent turmoil. As previously twittered, recently I purchased large amounts of Dow at $6.80 and again at $9 share (current price $15) despite the uncertainty surrounding the company at the time.
Why?
Dow Ag. At those share prices I was paying for Dow AG, and getting the rest of the company for free (Basic Chemicals, Specialty Chemicals, and Rohm and Haas)…..for FREE. I can’t say I would have made the decision were Dow Ag NOT part of Dow at the time.
Any decision to sell Dow Ag without extreme consideration for existing shareholders I cannot back or accept. Agrcultural products are going to be valuable for decades as the world population grows, farmable land remains fixed and biofuels take more of a center stage. That means the future earnings power for Dow Ag may just possibly dwarf most other areas of their business. Just look at the last two quarters, the worlds economy by any measurement fell off a cliff yet Dow Ag increased earnings double digits, not through cost cutting, but through volume gains (sales).
Results like that have a value that cannot be captured in the current environment buy a potential buyer.
For three years Dow has professed to want to change the earnings profile to a more stable/specialty focused one. Dow Ag fits perfectly into that. The retention of Basic businesses and the sale of Dow Ag runs counter to everything that has been portrayed as a goal.
The IPO/Sale plans say this: Dow is going to trade Dow Ag for Rohm and Hass. Since the proceeds are going to be used to pay of the Rohm purchase, at its most basic level, that is the deal for shareholders. I think if anyone is being honest, Dow Ag has more value that Rohm in terms of growth.
Sell anything else…..anything
Perhaps a partial IPO of Dow Ag? After speaking with people familiar with Dow’s plans, they have insinuated that is a realistic option. That would surely raise the necessary funds to cover the bridge loan due in a year. Still a repugnant thought….
Am I selling? No. The loss of Dow Ag would hurt greatly long term but short term would provide a boost as it would remove debt issues from the company. Shares would rally and provide those looking to exit much higher prices than current.
Part of the reasoning on the call was that “it is an Ag business with a commodity multiple” (because it is part of Dow Chemical) and that selling it would provide shareholders with the multiple return. Well, if that is the concern, spin it to us and let us realized the multiple expansion of it AND participate in the future growth. Dow could keep even 50% of it recognize the new multiple in the increase in the asset value. I would wager that if 50% were spun to shareholders to trade publicly, the 50% left at Dow would be worth what the whole is today.
However, the reverse of that is true also. As Dow Ag grows and commodity businesses are sold off, Dow Chemical becomes a Chemical company with more of a AG multiple. Long term, this is the direction I want.
The total loss of Dow Ag would most likely mean the loss of me as a shareholder and would, based on last years statements cause those shareholders left to most likely doubt anything coming out of HQ for years to come…rightly so..
Liveris said on the call today a decision will be made “30,60 or 90 days”. We’ll see…
So, I have been droning on for what seems an eternity (few weeks) that I feel this market rally is just over done and due for a fall. I still feel that way but am getting to the point I am going to put some money where my mouth is.
Now, don’t get me wrong. I have been very happy to be wrong for the last month as the rally has been very good to me. Core large long holdings like Dow Chemical (DOW) (which was significantly added to at $6.80 in March and again at $9 in early April), AutoNation (AN), Sears Holdings (SHLD) and Wells Fargo have all seen tremendous share price increases of at least 50% since the March lows (am still down 10% in Wells Fargo overall though). This makes up for the gut wrenching carnage in January and February although Sears and AutoNation are up 50% and 60% YTD respectively.
Even Borders (BGP) has finally shown signs of life almost tripling in a few weeks (still down 40% in this small position).
That being said, I cannot escape the fact that the economic fundamentals of the economy do not warrant the general market rally we have seen. It is also possibly true that the drop we saw early this year was overdone meaning part of this rally is simply correcting an over reaction to the downside in March. I am hesitant to fully buy into that though.
There are over 6 million folks without jobs now, the housing industry is simply in shambles and getting worse, foreclosures are surging, Q1 GDP is decidedly negative and Q2 looks only marginally if any better. Commercial Real Estate is the next time bomb to drop on banks and that fuse is only just beginning to burn and the Federal Reserve is just about all out of ammo unless they want to start paying people to borrow. In short, not too much to be optimistic about..
Do I short CRE with the SRS ETF? Not for me. REIT’s are already on death doorstep so buying in there might be a bit like going hunting and shooting a deer caught on a trap, not very satisfying or meaningful.
Short financials with FAZ? Not too sure about that one either. While the rally there has been spectacular and unwarranted, it has become clear that the US Government will stop at nothing, including changing accounting rules, bogus “stress tests” and more capital infusions to make sure the banks are propped up. That being said, I am hesitant to bet against the guy with the ability to change the rules of the game on a whim to make sure he wins.
Short the dollar with UDN? Now, while, the dollar may be headed for devaluation because of massive Treasury actions, when compared to many other currencies, it may actually gain in value vs them. Its perverse. In fact, since December that is what has happened. Being “less bad” than the other guy isn’t really a reason to invest.
I think the safest way to so it is the simple SH Short S&P ETF, PSQ to short the Nasdaq or DOG to short the DOW. It tracks to daily price fluctuation of the overall index without exposing the holder to the negative returns of the leveraged ETF’s. The 3X’s ETF’s are only good for short term trades and the volatility will scare most folks. That and the downside pain is fast and furious and the longer you hold them, any downside you experience exceeds any upside you see later unless it is dramatic.
These can protect you from a market sell-off and unlike the leveraged ETf’s, not hurt you bad should the market continue to rally (which it can, markets are not rational by any means). I like the SH the best of the lot. Should I go into it, the position will not be all too large, just enough to take the bite out of what I think is the upcoming sell-off
With natural gas at insanely low levels, there is value in the sector. I have a potential play on it.
Here is a fantastic post on the inevitable natural gas price spike courtesy of Chris Nedler at getREALlist
Here is the basics on supply/demand/pricing from the post:
Now I am seeing the same pattern in natural gas (or as traders sometimes call it, “natty”), only the danger of constrained supply is possibly even greater, since about 84% of US natural gas consumed is produced domestically and there is very little storage throughout the system.
Gas prices have plunged 72% from their record of over $13 per Mcf1 to $3.75 on Monday, taking it all the way back to 2002 pricing. (The spot price for natural gas has only fallen below $4 once since 2002, in September 2006.)
All that got me to thinking. How to play gas? I could go with the producers of it but since most of them can’t make money with gas under $6, an 80% rally in natural gas prices would do little for their fortunes (except keep them from Chapter 11).
I could play natural gas itself but it can rally to a level and just sit there while affiliated stock keep making money for shareholders.
We can substitute oil for natural gas and all of the above would be true also.
What then? Oil Well Services and Equipment. All producers need serviced on existing wells and close wells. When prices rebound, the corresponding increase in well activity will be a boon for these companies.
Enter Exterran Holdings, Inc. (Public, NYSE:EXH).
From the 10K:
We are a global market leader in the full service natural gas compression business and a premier provider of operations, maintenance, service and equipment for oil and natural gas production, processing and transportation applications. Our global customer base consists of companies engaged in all aspects of the oil and natural gas industry, including large integrated oil and natural gas companies, national oil and natural gas companies, independent producers and natural gas processors, gatherers and pipelines.
We operate in three primary business lines: contract operations, fabrication and aftermarket services. In our contract operations business line, we own a fleet of natural gas compression equipment and crude oil and natural gas production and processing equipment that we utilize to provide operations services to our customers. In our fabrication business line, we fabricate and sell equipment that is similar to the equipment that we own and utilize to provide contract operations to our customers.
We also utilize our expertise and fabrication facilities to build equipment utilized in our contract operations services. Our fabrication business line also provides engineering, procurement and construction services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities, the construction of tank farms and the construction of evaporators and brine heaters for desalination plants.
In what we refer to as “Total Solutions” projects, we can provide the engineering design, project management, procurement and construction services necessary to incorporate our products into complete production, processing and compression facilities. Total Solutions products are offered to our customers on a contract operations or on a turn-key sale basis. In our aftermarket services business line, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression, production, gas treating and oilfield power generation equipment.
Why Exteran?
Valuation: Even after writing off $1.1 billion in Gooodwill due to market conditions in Q4, Exterran still sports a book value of $32 a share. At the current $17 share price it trades at 53% of book. Cash flow and cash on hand are steady.
Stock Repurchase Program.
On August 20, 2007, our board of directors authorized the repurchase of up to $200 million of our common stock through August 19, 2009. In December 2008, our board of directors increased the share repurchase program, from $200 million to $300 million, and extended the expiration date of the authorization, from August 19, 2009 to December 15, 2010. See further discussion of the stock repurchase program in Note 15 to the Financial Statements. Since the program was initiated, we have repurchased 5,416,221 shares of our common stock at an aggregate cost of approximately $199.9 million. See Part II, Item 5 (“Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”) of this report for information regarding our fourth quarter 2008 repurchases.
Ownership: Nearly 45% of the stock is owned by 5 groups including 8% by ValuePlays favorite Seth Klarman’s Baupost Group.
Now, is this a “run out and buy some”? I don’t think so but I am keeping it high on the radar list. While both oil and natural gas are at unsustainably low levels. History tells us they can remain there for some time. It also tells us that the recovery to appropriate levels can be swift and violent.
As Nedler says:
The time it takes to raise capital for new drilling, deploy rigs, and start producing again after gas prices rise is a golden window of opportunity for investors. As long as marginal capacity remains in a razor-thin range, prices will stay high and low-cost producers will be rolling in profits again.
While it’s impossible to say when the US economy will recover and bring natural gas prices back into sustainable territory, I am confident that for those with at least a one-year investing horizon, there is no better time than now to begin accumulating those positions.
One has to watch economic activity for sign. Q1 will be reported in May and by then more data will be available as to global conditions. It is important to note this is not a pure US play but a global one. As global conditions improve, so ought Exterran’s.
Dow Chemical (DOW) filed its 8K regarding tis agreement to sell it s recently acquired Morton Salt division.
Morton had annual sales last year of $1.2bn and earnings before interest, tax, depreciation and amortization (EBITDA) of $270m meaning Dow received 6.2 times EBITDA for the asset, a very good price especially in the current environment.
So on Sunday March 8th I was on Fox News talking about what I felt was an upcoming rally in the stock market.
That Monday the S&P (.INX) sat at 676 and today hovers at the 800 market for a 18% gain in a dozen trading days. Great? No. Why not you say? While I expected a large rally, I did not think it would begin the following day. Because of that, names I own and was looking at adding to like GE (GE), Dow Chemical (DOW) and AutoNation (AN) have all climbed over 30% since then. The bad news is that I did not add to them then.
Do you know how hard it is to have something you wanted to buy, at an unbelievable price climb and to not have added to what you own? The near irresistible impulse is to run out an chase it higher and buy is killing me. There is also the self aggravation of NOT pulling the trigger then because you decided to wait it out just a bit longer, yes, I’m annoyed at myself.
But, I’m not buying now. Why? While the market was in my humble opinion too low at 676, there is not a real reason it should be at 800 now, this soon. The economic landscape, while not deteriorating as badly as before, is by no means improving. Recent housing numbers were not positive, unemployment still getting worse and lending still restricted.
Banks, rather than taking TARP money and helping to expand the economy has grown tired of overbearing politicians have decided it is not worth it to have it and has said they will instead pay it back. This is bad for growth.
Now, things aren’t desperate. I am not gloom and doom. I just do not think the value of US business is 18% higher today than it was 12 days a go.
So I wait. I wait for the recalibration of value I think is coming and then I will be sure the next time not to miss the lower prices.
Disclosure (“none” means no position):Long Dow, GE, AN
Dow Chemical Co. (DOW) the largest U.S. chemical maker, is in talks to revive a basic-plastics joint venture with Kuwait that the country’s Petrochemicals Industries Co. abandoned last year. “We are definitely in discussions,” Chief Executive Officer Andrew Liveris said today in a telephone interview. “I want to downplay expectations because of what happened last time.”
Kuwait’s cancellation of the K-Dow Petrochemical venture in December deprived Dow of $9 billion it planned to use for its acquisition of Rohm & Haas Co. That left Liveris seeking to amend financing and obtain new terms for the $16.5 billion purchase, which was agreed upon March 9.
Dow, based in Midland, Michigan, also is talking with two “very interested” parties about buying a stake in the basic- plastics unit, Liveris said. The likelihood of reaching a new deal with Kuwait is “low,” he said. “I have learned that unless the money is in the bank, OK, I am not going to promise it,” Liveris said.
Bidding War
Liveris said he didn’t include a clause in the Rohm & Haas merger agreement that would have let Dow out of the deal if the Kuwait venture failed because no one anticipated the financial collapse that occurred after the agreement was signed July 10. Dow won the Rohm & Haas auction with a $78 a share bid, topping BASF AG’s $75 offer.
“Even if you wanted a financing out, you wouldn’t have won Rohm & Haas’s bid because BASF would have won it,” Liveris said. Kuwait canceled the K-Dow venture on Dec. 28 after opposition lawmakers pressured the government to scrap the deal, which they said was overvalued amid falling oil prices. The cancellation prompted Standard & Poor’s and Moody’s Investors Service to cut Dow’s credit ratings.
Dow plans to sell $4 billion of assets this year as part of a plan to repay as much as $10 billion in short-term loans for the Rohm & Haas purchase, which closes April 1, and to maintain investment-grade credit ratings. A deal to sell Rohm & Haas’s Morton Salt unit, the biggest U.S. salt producer, for at least $1.5 billion will be announced this month, Liveris said.
“We are moving on that one very fast,” Liveris said. “Given what we achieved in five days recently, I would consider it almost wimpy of us not to achieve it in 20 days.”
‘Serious Bidders’
Dow will narrow six “serious bidders” for Morton Salt to three, possibly selecting one for exclusive negotiations, by this weekend, he said.
The value of Dow AgroSciences, which makes pesticides and develops genetically modified seeds, isn’t appreciated by investors, Liveris said. The unit “clearly” is worth more than the $5 billion to $8 billion that some analysts have estimated, he said. The company doesn’t immediately plan to sell the business, Liveris told investors on a March 9 conference call.
Asset sales are part of efforts to improve Dow’s balance sheet so another dividend cut “should never be necessary,” Liveris said. Dow slashed its dividend 64 percent on Feb. 12, the first reduction in company history, to save $1 billion a year, after Liveris promised not to cut the payments.
“After the events of the last three months, it would be terrible of me to say never again,” Liveris said.
So, where are we? There is some math here that does not quite add up and for shareholders that seems to be a good thing. Dow in its presentation yesterday said it would sell the $4.3 billion in assets to pay off the credit line in one year. If the get $1.5 for Morton Salt, that leaves $2.8 billion in asset sales. The commodity business that was originally valued at $9 billion (Dow’s 1/2) is worth less in this environment, but not almost 70% less.
I am saying here than Liveris has got burned big time over the past year. One would expect anyone who has that happen to swinging the pendulum to the other side and become so conservative that any estimate given is a real low ball figure.
On another note, analysts estimate the value of Dow Ag at $5 billion to $8 billion. Five billion dollars equals the current market cap of the whole company. Essentially buyers today pay for Dow Ag and get the specialty chemical business, the commodity chemical business and the rest of the company for free. Not a bad deal.
As part of today’s agreement, Rohm and Haas’s two largest shareholders have agreed to purchase $2.5 billion in face value of perpetual preferred equity issued by Dow. In addition, one of the shareholders, the Haas Family Trusts has agreed that at Dow’s option, they will make an investment in an additional $500 million of Dow’s equity. These equity investments substantially reduce the debt financing required to fund the acquisition, Dow has restructured the transaction to essentially pay the equivalent of $63 per share in cash, and $15 per share in face value of preferred equity securities. To fund the acquisition of Rohm and Haas, Dow will use the proceeds from the equity issuances to reduce the amount it would otherwise be required to draw down from the $12.5 billion bridge loan, which was renegotiated last week to provide a one-year extension on $8 billion of the total loan. The financing for the acquisition also includes equity investments of $3 billion by Berkshire Hathaway and $1 billion by the Kuwait Investment Authority (KIA) in the form of convertible preferred equity.
Acquisition Delivers Significant Cost and Revenue Synergy Opportunities
Dow plans to achieve its long-term goals for the Rohm and Haas acquisition with a carefully conceived path forward built upon the cornerstones of financial discipline and operational excellence. Dow has put into place an even more aggressive plan to realize combined synergies of $1.3 billion, up from $910 million, as originally outlined. With a long history of operational excellence, Dow has a demonstrated willingness to make the decisions necessary to maintain and improve financial performance. Cost savings will come from increased purchasing power for raw materials for the combined company; manufacturing and supply chain work process improvements; office consolidations and the elimination of redundant corporate overhead for shared services and governance.
Finally, as part of the Company’s plans to improve its financial position, Dow has commenced an aggressive asset divestment program involving a number of Dow and Rohm and Haas business units expected to yield approximately $4 billion including:
1. Dow’s 45 percent stake in Total Raffinaderij Nederland NV (TRN), the Dutch petroleum refining partnership with Total Group. The sale process is underway;
2. Some of Dow’s equity stakes in its olefins and derivatives business in SE Asia. Preliminary discussions with the relevant parties have already begun;
3. Morton Salt, a division of Rohm and Haas, contingent upon the closing of the proposed acquisition of Rohm and Haas by Dow. Interested parties have submitted bids, and Dow will evaluate these bids as appropriate over the course of the coming weeks to determine timing of the sale process.
Divestments from this program, in addition to the increased equity financing will essentially address the cash shortfall created by the failure of the K-Dow transaction to close as scheduled.
For those who do not want to go through the whole presentation, here is the slide that answers most people questions, the financing and the bridge loan:
So, where are we?
Dow is offically no longer a commodity chemical company after April 1. 70% of 2008 EBITDA will be from specialty products. This will cause immediate PE expansion from high single digits that commodity producers tend to have the mid to high teens the specialty ones enjoy to to their more consistent earnings. Dow will be cash flow positive in 2009 and have the term loan used to settle the transaction paid off withing the year.
Interestingly enough, only $4.3 billion of the loan reduction will come from asset sales. Remember Dow was looking at $9.5 billion from the Kuwait JV that Kuwait bailed on essentially at the signing. Let’s also not forget that Dow is entering arbitration with Kuwait over damages in the case. Dow has said in the past they are owed the $2.5 billion breakup fee in the deal. There is also a scenario is which Kuwait decides to renter talks with Dow for some of the businesses they were originally suppose to buy. Neither of these scenario’s are baked into current projections yet are very real possibilities.
But lets look around. Negativity is everywhere. Few would question the operational ability of the combined entity and the global powerhouse it now is. But, management at Dow does have a real credibility problem. For the price paid for this deal, to the failed Kuwait JV and the dividend cut, investors are left wondering “what’s next?”.
That is going to be a bit of a cloud over the company until they can report some positive news. We need some unexpected good news, not bad. Yes, I know that Rohm & Haas is a one of a kind company and that Dow’s was not even the highest offer in the auction for it. Yes, I know Dow had no control over the Kuwait decision. Yes, I know that the dividend cut had to happen and were it not for the Kuwait decision, would not have happened. I know all this and all of it is true.
Knowing that does not change perception, it helps us rationalize the bad news. We need something to happen we do not expect that is good. I want to hear they win in arbitration and are awarded $1 billion plus. I want to hear the global de-stocking that happened in Q3 is over and orders and pricing are firming at a faster than expected pace. I want to hear that Kuwait has come back to the table or Sabic (Saudi Basic Industries) want the commodity business and the proceeds are far more than currently projected. I want to hear that because of any of these the dividend is going to be partially restored. We see the projection for debt reduction, come back to us in 6 months and tell us you are ahead of pace paying off the bridge loan.
Any of these will tell investors that the rationalizing the bad news was not insane but logical and that the events that happened could not be avoided. More bad news tells us that perhaps management is not taking into account various alternative scenarios when planning or if they are, not putting enough stock in them possibly happening and not preparing appropriately for them.
I see one of two books being written about Dow CEO Andrew Liveris down the road. One is about how the global slowdown forced a poorly planned merger on the company and eventually cost him his career. The other is a book about how he deftly managed the company through the worse economic conditions in over 80 years, completed the merger and created the world’s preeminent specialty chemical company accomplishing the vison he had when he took it over. Either one could be written now. We are at the proverbial fork in the road.
