Hedge fund Third Point calls for Dow to consider spin-off of petrochemicals
2014/01/22

BY CHEMICAL WEEK

Hedge fund Third Point LLC (New York) said that it has taken a stake in Dow Chemical and urged management to evaluate a spinoff of its petrochemical operations.  

 

In a letter to investors, Third Point CEO Daniel Loeb called on Dow to hire advisors to conduct an assessment of whether its current petrochemical strategy maximizes profits and aligns with Dow’s goal of transforming into a specialty chemicals company. “The review should explicitly explore whether separating Dow’s petrochemical businesses via a spin-off would drive greater stakeholder value.”

 

Third Point did not disclose the actual size of the stake, but says Dow is now its largest current investment. Sources put the size of the investment at $1.3 billion, a roughly 2.3% stake based on Dow's current market capitalization. Third Point has about $14 billion in assets under management.

 

A Dow spokesperson says the company welcomes “all constructive input with a common goal of enhancing long-term value” for shareholders. Loeb says that Dow has underperformed peers over the past decade, generating a return of 46% including dividends. The results reflect a “poor operational track record across multiple business segments, a history of under-delivering relative to management’s guidance and expectations, and the ill-timed acquisition of Rohm and Haas,” Loeb says.

 

Loeb notes that over the past five years, the shale revolution in North America has led to a boom in natural gas liquids production which has dramatically reduced raw material costs, while China and other emerging market economies have aggressively grown downstream derivatives capacity.

 

“This combination has led to significant upstream margin expansion in North America where Dow is the largest ethylene producer, and a commoditization of numerous downstream derivatives margins,” Loeb says. “Dow’s current petrochemical strategy seems misaligned with the changed landscape.  Our analysis suggests that Dow’s downstream migration strategy within petrochemicals has not yielded material benefits so far and instead may be a significant drag on profitability."