Third Point acquires stake in Dow Chemical, calls for spinoff of its petrochemicals business

22-Jan-14

Third Point, the hedge fund led by billionaire Daniel Loeb, took a stake in Dow Chemical Co. (DOW) and called for a spinoff of its petrochemicals business to improve profitability. Dow should hire external advisers to review its strategy and the potential benefits of a spinoff, Third Point was quoted in Bloomberg. The fund’s stake has a value of about US$1.3 bln, as per an unidentified source. Dow’s share performance has lagged behind competitors that are more focused on petrochemicals, such as LyondellBasell Industries NV (LYB) 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 spinoff, 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. 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. Cost cuts and improved operations in the petrochemicals business could add “several billion dollars” to earnings before interest, taxes, depreciation and amortization. A petrochemical-focused Dow spinoff would generally include the performance-plastics, performance-materials and feedstocks-and-energy units, Third Point said.