The Dow Chemical Company Prepares to Reveal Its Beach Body


Like middle-aged spread that accumulates over time, companies also become slower and fatter over the years, weighed down by acquisitions and extensions that lead to a flabby performance. At some point, it becomes apparent the excess weight has to go. Dieters shed the pounds and companies calve off business units, either putting them up for sale or spinning them off into stand-alone operations.

Petrochemical plant. Source: Dow Chemical.

Dow Chemical is in the midst of a starvation diet, having agreed last year to sell off its polypropylene business to W.R. Grace for $500 million and announcing in December a $5 billion spinoff of its chlor-alkali business.

Yet following the news that activist hedge fund operator Third Point Capital had taken a sizable $1.3 billion stake in the specialty chemicals giant, it's likely we're going to see Dow shed even more pounds, er, businesses, as Daniel Loeb agitates for the complete separation of its entire petrochemical unit, one he charges has held back the stock's advance.

Despite outperforming the S&P 500 Chemicals Index in 2013, Loeb maintains it's under-performed the index over the past decade and an investor can buy Dow shares today for the same price they could have back in 1999.

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Dow's petrochemicals business has not benefited from the wild expansion of the shale oil and gas boom so by divesting that division it can better focus on maximizing its profits by realigning itself away from downstream operations. In turn, the remaining business can become a true specialty chemicals company.

Rival DuPont was also pressured by activist investor Nelson Peltz into concentrating its business lines. It sold its performance coating unit in 2012 for $4.9 billion and last year announced the spinoff of its performance chemicals unit.

The specialty chemicals industry has been ripe for a shake up and activist investors have largely been the straws stirring the drinks. Both Air Products & Chemicals and Ashland responded to arm twisting by activist investors that targeted their companies, with the former adding three new directors at the prodding of Pershing Capital while Jana Partners cajoled the latter into ending staggered three-year terms for directors. More broadly, investors have also been having a large say in the future of restaurant operators Darden Restaurants and Bob Evans Farms, as well as clothing retailers Abercrombie & Fitch, Men's Wearhouse, and Jos. A. Bank.

Although separating the commodity and specialty chemicals businesses as Loeb proposes may increase costs because they share among other things an integrated supply chain, by focusing on more attractive growth businesses like agriculture, food, electronics, and pharmaceuticals Dow will gain a "valuation uplift from increased business focus and disclosure."

Dow's not necessarily opposed to the plan, as it had already said it hoped to realize some $3 billion to $4 billion of divestments by the end of 2015. Coupled with cost-cutting measures that analysts peg at $750 million this year (up from $500 million in 2013), Dow Chemical could become a svelte beauty that will turn the heads of investors, activist or not.

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