Dow Chemical's Recent Disposals Could Be Good News for Axiall

Dow Chemical's Recent Disposals Could Be Good News for Axiall

The Dow Chemical Company announced on Dec. 3 that it was going to shed up to $5 billion of "low margin assets," as the company continues to streamline itself, focusing on downstream high margin products. These $5 billion in assets include 40 production facilities across 11 sites and 2,000 employees. The company also announced that it will shut down approximately 800,000 tons of chlorine and caustic equivalent production capacity.

In the long term this will be a great move for investors. Indeed, it is currently forecast that the global market for polyvinyl chloride, aka PVC, will be oversupplied by an average of 18 million tons annually during the next ten years. This oversupply will obviously pressure margins for all producers around the world. However, domestic U.S. manufactures will likely remain profitable, due to their access to low-cost natural gas and petroleum -- PVC is manufactured using a combination of natural gas, petroleum, and salt. Still, Dow shutting down capacity will remove some of the oversupply in the global market.

Some of Dow's low-margin assets that it is disposing of include chlorine and brine businesses, once again key components of the PVC production process .

Not alone
Dow is not the only chemicals company trying to push itself away from the low-margin side of the business. DuPont (NYSE: DD), the largest U.S. chemicals group by market capitalization, recently announced plans to spin off its low-margin chemicals division, which produces paint pigments, refrigerants and Teflon, following the company's divestment of its performance coatings business in February. Unfortunately, this part of DuPont's business has been letting the side down recently, as pricing pressures in the market caused the division's profit to fall by 38% during the fiscal third quarter.

As DuPont is spinning off, rather than selling, the business, there is scope for the company to benefit from future profits; the company will be able to acquire a stake in the new entity later through a shareholding with limited risk. The same opportunity would not be available if the division was sold to private equity. What's more, spinning off rather than selling the business should be tax-efficient for both investors and DuPont.

All in all, analysts have valued this part of DuPont's business at around $11.5 billion, 20% of DuPont's current market capitalization.

Industry repercussions
On the news of Dow's sales, the share price of small but rapidly growing Axiall Corp surged 10% as the company now has a vast array of growth opportunities available to it. Personally, I have long been a fan of Axiall, and the recent move be Dow has only increased my conviction that the company is a great long-term investment.

Why? Well, let me explain. First, as I have already mentioned, the shutdown of capacity should go some way to alleviating the pressure on the supply of PVC to the industry, which should improve Axiall 's margins. Second, these asset sales offer Axiall an opportunity to expand through acquisitions, something the company and its management has already proved that it can do well.

Growing rapidly through acquisitions
Axiall was created through a merger between Georgia Gulf and PPG's commodity chemical's business; so far this combination is going extremely well. Indeed, cost savings are running ahead of plan and strong cash flows are already allowing the company to reduce debt ahead of schedule. In particular, since the deal completed, net debt is down nearly 11% from its high, based on numbers released at the end of the company's fiscal third quarter.

This strong performance gives me confidence in Axiall's management and leads me to conclude that if the company makes any bolt-on acquisitions stemming from Dow's divestment program, they will be well integrated and rapidly improve Axiall's earnings growth. What's more, as a primarily U.S.-focused chemicals company, Axiall is likely to benefit from domestic low-cost natural gas and oil, further improving the company's profits from PVC.

Foolish summary
So overall, Dow's divestment program should be beneficial to its investors as the company concentrates on the higher-margin downstream side of the chemicals business. However, the program also provides a huge opportunity for Axiall to grow even faster than it is at present.

Axiall was formed through a merger, and so far the company has not put a foot wrong. It should see further growth through bolt-on acquisitions, and based on the company's history of integration, these acquisitions are likely to go well. All in all, Axiall could be about to embark on a period of rapid growth.

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Fool contributor Rupert Hargreaves owns shares of AXIALL CORPORATION. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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