Shares of U.S. chemical kingpin Dow Chemical (DOW) shot up after activist investor Dan Loeb's Third Point hedge fund bought a major stake in the company. While Third Point did not specify the number of shares it purchased, it said that Dow is its biggest investment yet.
Moreover, Third Point wants Dow to spin off its sluggish petrochemicals business and focus instead on high-margin, fast-growing businesses including agricultural science and electronics and functional materials. The entity, which has roughly $14 billion in assets under management, reportedly forked out $1.3 billion for the stake buy.
Investors reacted favorably to the news, sending Dow’s shares up as much as 8.4% in the trading session yesterday. The stock eventually closed at $45.93, gaining around 6.6%. Dow, which has a market cap of $55.5 billion, has delivered a one-year return of roughly 41%.
Dow, which continues to face challenges in Europe, remains actively focused on seeking opportunities to optimize its portfolio by selectively spinning off or selling its underperforming assets (that are exposed to raw material price fluctuations) and gradually shift focus to high growth businesses.
Similar moves are also being pursued by other chemical makers including Dow’s compatriot DuPont (DD). DuPont is spinning off its struggling performance chemicals unit as well as glass laminating solutions and vinyls business.
Dow, last month, revealed its plans to exit a major portion of its chlorine business that has been in operation for over 100 years. Commodity chemicals assets that are being identified for separation represents up to $5 billion in revenues.
Dow has jettisoned non-core assets worth roughly $10 billion since 2009. It has completed or announced transactions totaling $700 million over the last twelve months. CEO Andrew N. Liveris, in third-quarter 2013 earnings call, said that the company plans to mop up at least $3 billion to $4 billion from non-core asset sales over the next several months. Proceeds from these transactions are expected to be used for boosting shareholder returns, reducing interest expenses and organic growth investments.
However, Loeb is reportedly seeking a more ambitious and dramatic transition by breaking up Dow into a commodity petrochemical and specialty chemicals company with a view that the move will create more value for the company’s shareholders.
Loeb, in a letter to investors, said that Dow has significantly underperformed the S&P 500 over the last decade citing “ill-timed” acquisition of Rohm & Haas and lower-than-expected performance in the petrochemicals business as reasons, among others. He added that following the proposed spin off, the separated entities would be able to generate higher earnings over the next few years.
Dow, in response, said that it is aware of its owners’ positions in the company and is constantly reviewing its operations and strategies to boost shareholder value and enhance competitiveness. Spokeswoman Rebecca Bentley said that the company engages with all of its stakeholders to understand their views and welcomes all constructive input.
Dow, which currently carries a Zacks Rank #4 (Sell), will report its fourth quarter results on Jan 29.
Other companies in the chemical industry worth considering include L'Air Liquide SA (AIQUY) and Northern Technologies International Corp. (NTIC) with both carrying a Zacks Rank #1 (Strong Buy).