Dow: Expect a Commodity Sale into a JV Very Soon

by: Todd Sullivan

Now that I have had time to digest Dow Chemical's (DOW) move on Wednesday, something just keeps popping up in my head. Have you ever done a reorganization of your home or even a room in it? What is the first thing you do? Get rid of the stuff you really do not use that much or need anymore. This is what I just cannot get past with Dow.

After about a year of predicting CEO Andrew Liveris had no major acquisition or merger plans, I think I am changing my tune. Now, Dow just reduced its workforce by 2.3% and will save $180 million a year with the businesses it is shuttering. More importantly, they have also freed up millions in capital to be deployed elsewhere more profitably. This is where it gets good.

Liveris and Dow have made no secret of divesting away from the cyclicality of their commodities business. What would be the most effective way of doing it? How about using the very same strategy they have been using for the past year? Selling chunk of this business to outsiders and placing them into the Joint Venture [JV] category.

This would provide Dow billions of dollars instantly to be deployed in buying some specialty chemical makers without impairing the balance sheet (another Liveris prerequisite for any acquisition). Without having to use debt or stock to make a major purchase, it would also settle nicely into Liveris requirement of being accretive to earnings. It also would allow Dow to benefit from the commodities business through the JV's. While an erratic business, it is still very profitable when it earnings are on the upswing.

Who would buy the commodity business? There are a host of developing nations (Asia, Middle East & South America) that Dow already has JV's with that would love to have the businesses if for no other reason than to secure a supply of the primary product they produce, plastics.

Do I think Liveris has a "for sale" sign on the company? No. I do think he is in the process of positioning it to make a major move very soon. I expect the commodity sale into a JV to be announced after the new year and a merger or major purchase to be announced at the latest by the end of February.