Dow Chemical Sizes Itself Up and Trims the Fat

Money Cut in Half

Source: http://www.flickr.com/photos/76657755@N04/

Dow Chemical (NYSE:DOW) closed up 2.36 percent at $39.98 per share on December 2. Shares rose after the company announced the details of a plan to “carve out” approximately $5 billion worth (of annual revenues) of its low-margin commodity chemicals business.

“Today’s announcement represents a continuation of the shift of our company toward downstream high-margin products and technologies that customers value, and generate consistently higher returns than cyclical commodity products,” said Chair and CEO Andrew Liveris in a statement. “These businesses have served us well over decades, but are serving markets that Dow has exited over time, and we are therefore right-sizing our upstream integration to match the downstream focus that we started a decade ago.”

The announcement comes as executives discuss the possibility of removing the word “Chemical” from the company name entirely. In an interview with the Wall Street Journal, Liveris suggested that the various components of the Dow of the future would be connected by “chemistry rather than chemicals.” The company has already flirted with the idea, marketing the solo “Dow” brand during the London Olympics.

Citigroup suggested that Dow could be thinking about divesting its low-margin commodity chemicals businesses — particularly chlorine and derivative products — at the beginning of September. The bank estimated that Dow’s epoxy/PO-PG/chlorinated organics businesses could be worth at least $2.2 billion to $2.5 billion, and said that any more away from these assets was a step in the right direction. Citi has a Buy rating and a $40 price target on Dow stock, which is slightly below the mean analyst price target of $41.90 per share.

Dow has a divestiture target in a range between $3 and $4 billion over the next 18 to 24 months. This compares against $700 million completed or announced transactions over the past 12 months. Dow stock has performed fairly well over the past 52-week period. Shares are up about 33.3 percent on the year, outpacing the S&P 500 index.

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