Dow Chemical Chief Executive Andrew Liveris unveiled the most decisive move of his decade-long campaign to shift Dow out of the commodity chemicals business today, announcing an agreement to sell its chlor-alkali business to Olin in exchange for $2 billion and more than half the smaller company.
In a conference call with investors, Liveris said the $5 billion transaction shows how “Dow continues to behave as our own, best activist.” That was a dig at Third Point LLC’s Daniel Loeb, who has been prodding Dow for more than a year to split the company into petrochemicals and plastics businesses. Dow shares immediately surged more than 3 percent, adding nearly $2 billion to the company’s market value. Olin shares jumped even more, climbing 20% and boosting the value of the maker of chemicals and Winchester ammunition by more than $400 million.
The deal will create the world’s largest chlorine producer with 5.7 billion tons a year of production and $1 billion in earnings before interest, depreciation and taxes.
Dow shareholders will own 50.5 percent of the new Olin, and Liveris will use some of the $2 billion in cash to accelerate Dow’s share buyback program.
Dow announced plans to divest its 118-year-old chlorine business, which was one of its first products, in December 2013. That announcement came as Loeb was assembling what has become a $1 billion stake, with the goal of breaking up the company to unlock what he said was obscured value in its ethylene business. Loeb successfully pressed Dow to add four independent directors on the board last November.
Dow will accomplish the split-off through a reverse Morris trust, a tax-free transaction under which it holds a majority position in the acquiring entity. Dow says the sale will be “immediately accretive,” boosting earnings by a nickel a share.
The new Olin will be able to wring $200 million a year in savings from the combined entity, the two companies said, by consolidating operations and other efficiencies. Dow also rids itself of the pension liabilities of employees that will shift over to Olin.
Olin will continue to buy feedstocks, primarily ethylene, from Dow under a 20-year contract that includes a $400 million up-front payment. By getting the chlorine business off its books it removes $10 billion in investment-consuming assets, allowing it to concentrate on higher-margin products while retaining an interest in any improvement in earnings at Olin.
Liveris said Dow is shifting the chlorine business to Olin at a “trough” in the North American market for the base chemical used in many industrial operations. Olin will be able to use the increased cash flow to reduce debt, while Dow can shrink its shares outstanding and thus help support higher earnings per share from its remaining operations.
Liveris still likely has to get rid of Dow’s agricultural chemicals business, which doesn’t have much in common with the rest of the enterprise. With $7.3 billion in sales and almost $1 billion in EBITDA last year, that unit could be worth $10 billion. Liveris, in an interview with me last year, said he will look at “every interesting offer” for the business, which is growing nicely. “I know it’s a hot property,” he told me then. “But it’s a hot property for us as well.”
Dow also has to contend with a potential flood of stock from Warren Buffett’s Berkshire Hathaway if its stock trades above $53.72 for 20 consecutive days. After that Berkshire can convert $3 billion in preferred shares into common, creating a rich new pool of stock for Liveris to mop up with what’s left of the Olin proceeds. Dow shares briefly traded above $53 back in September.
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