Saturday, July 12, 2014
Inquirer Daily News

Hedge fund acquires stake in Dow, calls for spin-off

Third Point L.L.C., the hedge fund led by the billionaire Daniel Loeb, has taken a stake in Dow Chemical Co. and called for a spin-off of its petrochemicals business to improve profitability.

Third Point's stake in Dow is its largest current investment, the hedge fund said Tuesday in a letter to investors. Dow should hire external advisers to review its strategy and the potential benefits of a spin-off, Third Point said.

Dow bought Philadelphia-based chemical giant Rohm & Haas for $15.3 billion in 2009. Dow recently opened a technology center in Collegeville, Montgomery County, in a building owned by drugmaker Pfizer.

While Third Point has been talking with Dow since late last year, those discussions have not included the chief executive officer or board members of the company, said a person with knowledge of the matter. The fund's stake has a value of about $1.3 billion, the person said, asking not to be identified, as the information is private.

Dow's share performance has lagged behind competitors that are more focused on petrochemicals, such as LyondellBasell Industries N.V. and Westlake Chemical Co., as new drilling methods in U.S. shale formations unlock an abundance of natural gas. Shale gas has slashed costs for chemical makers such as Dow that use gas both as a raw material and to power factories.

"We believe the benefits from a spin-off, including financial uplift from operational improvements at Dow Petchem Co. and the potential valuation uplift from increased business focus and disclosure, far outweigh the supposed integration benefits," Third Point said in the letter.

Dow jumped 6.6 percent to $45.93 at the close in New York, the biggest gain in more than two years. CNBC reported the stake earlier Tuesday.

In nine years leading the company, Dow chairman and CEO Andrew Liveris, 59, has tried to boost profit by focusing on specialty businesses such as pesticides, genetically modified seeds, paint ingredients, and electronics. He tried to sell a 50 percent stake in the plastics unit to Kuwait, a deal that failed in 2009 amid the financial crisis.

The tables have turned on Dow, as U.S. shale gas has increased earnings from petrochemicals, Third Point said in the letter. Petrochemicals in most of the world are made from naphtha, an oil derivative whose price reflects a tripling of oil prices since the end of 2008, widening the advantage of U.S. gas-based production, according to Bloomberg Industries.

"Dow's current petrochemical strategy seems misaligned with the changed landscape," Third Point said in the letter.

Cost cuts and improved operations in the petrochemicals business could add "several billion dollars" to earnings before interest, taxes, depreciation, and amortization, Third Point said.


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