This has been the year of the split-up, with divestitures proving to create value. But one company that has continued to make the case for staying together is Dow Chemical (DOW) , which has resisted pressure from Dan Loeb's Third Point Management. More negativity (on a website called value-dow.com) came just a day after a big investor day for the company where it outlined more divestitures and more shareholder return.
This is one to keep on the radar - and it is well positioned because either the company will continue to create shareholder value on its own or have to take more extreme actions, as prompted by Loeb.
A quick review of events:
- Response to Loeb
- Loeb's Jan 21st letter pushed strategic review of a separation of the petrochemicals business via spin-off, noting the current downstream migration strategy "seems misaligned with the changed landscape" and is instead a "drag on profitability" as upstream assets subsidize downstream derivatives. Splitting the company into "Dow Petchem Co" and "Dow Specialty Co" would enable operational improvements at the former and valuation uplift from the latter, which, in Third Point's view, far outweighs "supposed integration benefits"
- Back in 2007, two senior Dow execs were allegedly involved with investment bankers looking at ways to split Dow into 2 components--a commodity and specialty portion. However, Dow has stated in the past that the benefits of vertical integration
- Split of chemical name FMC is different animal-- The decision by FMC to voluntarily separate its agriculture and pharmaceutical biz from its commodity minerals should create a more valuable company. Just like with Dow, the specialty chemicals biz was being over shadowed by weaker performance in other segment (minerals in the case of FMC and petrochemicals in the case of Dow). But FMC likely be a cleaner breakup story--Dow benefits from an integrated supply chain, with commodity petrochemicals often serving as building blocks for higher-margin specialty products (harder to see such synergies at FMC)
- Actions company has taken to increase value
- Company is transitioning from commodity exposure toward more specialty-focused products (selling assets and re-positioning portfolio)-- though maintaining the commodity businesses that remain well positioned
- Also aggressive productivity program under way that it announced over two years ago
- Strong earning beats (last quarter was best since 2007) and exceeding goals amid challenging markets-- "clear evidence" of DOW's ability to "manage all aspects of our integrated business" and focus on actions DOW is taking to "further increase value for shareholders" (ie penetrating higher margin markets, exiting nonstrategic assets/value chains, focusing on productivity and cost controls)
- Plus, buyback and dividend strong (including latest announcements this week upping dividend by 14 percent and announcing share repurchase program)
- Good cash position (additional optionality)
- Focusing on accretive projects as ag launches and investments in the US Gulf Coast and Sadara--focus on high growth and high margin
- Non-core assets proceeds (Dow is getting rid of non-core parts of biz), and they just increased divestiture target to $7-8.5bn by mid-216 as it is reducing Kuwaiti Joint Ventures and also sold ANGUS Chemical Company
- DOW also has realigned external reporting segments to make their story even more clear
The bottom line: Dynamic activist dynamics underway, but either way it goes, Dow is a buy right here.