The activist investor Dan Loeb is putting the right accelerant into Dow Chemical. Shares of the $52 billion company jumped more than 7 percent at one point on Tuesday after Mr. Loeb called for a split of its petrochemicals and specialty chemicals businesses. He may be overly optimistic about the financial benefits, but a rough sum-of-the-parts suggests merely breaking up Dow could increase its value by a fifth.
Dow’s chief executive, Andrew Liveris, is by no means averse to splitting off some commodity businesses. The company is already planning about $3 billion to $4 billion of divestments by the end of 2015. That’s on top of cost-cutting that Credit Suisse expects to produce $750 million in savings this year, up from about $500 million in 2013. So far, though, Dow has resisted going the route of DuPont, which is pursuing a full commodity chemical spinoff.
Mr. Loeb’s proposal to split off commodity petrochemicals would leave a company focused on more attractive growth businesses like agriculture, electronics and pharmaceuticals. That might warrant a richer trading multiple than the combined company. The separated businesses would also be free to focus on their own profitability, potentially generating higher earnings over time.
Dow may fret that dividing commodity and specialty chemicals would add costs because of integration between their supply chains. Mr. Loeb thinks that concern is overblown. He estimates the separated companies could generate combined earnings before interest, tax, depreciation and amortization of up to $14 billion in a few years’ time, compared with this year’s forecast of $8.7 billion and a consensus analysts’ forecast of $10.2 billion for 2016.
That may be aggressive. But the effect of doing no more than spinning off these businesses could have an immediate benefit. Assume commodity chemicals account for about two-thirds of Dow’s forecast $8.7 billion of Ebitda in fiscal 2014. Then apply chemical peers’ average 7.5 times forward enterprise multiple to forecast commodity Ebitda, and agriculture-focused Monsanto’s 11.5 times to the rest.
Adding the two together implies an enterprise value of about $77 billion for the company - a 20 percent premium to its current enterprise value, based on Credit Suisse’s assumption for this year’s net debt. Of course, Mr. Liveris still needs to act. But it’s no wonder investors reacted favorably.
Kevin Allison is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
