Loeb's Third Point again nudges Dow Chemical to improve

By Svea Herbst-Bayliss and Ernest Scheyder

BOSTON/NEW YORK, May 1 (Reuters) - Dow Chemical Co's "integrated strategy" is costing shareholders billions of dollars and executives should work harder to boost results and transparency, activist investor Daniel Loeb said on Wednesday.

In his most-detailed comments about the company since adding it to his $14.3 billion hedge fund Third Point's portfolio in January, Loeb praised management for taking some positive steps but made clear that more work needs to be done.

The company, the largest U.S. chemicals company by sales, could make an additional $2.5 billion annually in earnings before income taxes, depreciated and amortization (EBITDA) if it focused more on selling ethylene, propylene and other basic petrochemicals on the open market and less on using these materials to make foams, glues and other consumer products, Loeb said.

"Management needs to focus on what is driving this underperformance and how to cure it," Loeb wrote in a letter sent to investors on Thursday. Reuters obtained a copy.

"Dow's integrated strategy," Loeb wrote, "does not maximize profits."

Loeb contrasted Dow Chemical with rival Lyondell Basell , and wondered why, despite Dow's far higher production capacity, the two companies generate essentially the same EBITDA in their respective basic chemicals businesses.

Shares of Lyondell, which only emerged from bankruptcy protection in 2010, have more than doubled in the past two years. Lyondell, Loeb wrote, "is focused on being the lowest cost commodity petrochemical producer," a strategy he said Dow should emulate.

Loeb, one of the hedge fund industry's most closely watched investors, said management did the right thing in raising Dow's dividend in January and in promising to become more transparent.

Yet the dividend remains below pre-recession levels and, Loeb wrote, Chief Executive Andrew Liveris and other executives could do more to be transparent.

That goal would not be achieved by joining the Feedstocks & Energy and Performance Plastics segments, as the company suggested it could do on its first quarter earnings call, Loeb wrote.

And Loeb blasted Dow Chemical's opaque pricing. The company sells material at cost between units, an uncommon practice in the industry that while technically not in violation of accounting rules, does raise eyebrows. For example, a Dow Chemical plant that produces ethylene sells the chemical at cost to a plant that makes polyester resins.

Exxon Mobil Corp and other large chemical producers typically sell basic chemical in-house at market rates, better helping investors gauge an ethylene plant's profitability.

"The priority should be to implement a consistent, marketbased transfer pricing methodology across and within all segments so shareholders can clearly understand each business unit's underlying profitability," the hedge fund said in the letter.

Midland, Michigan-based Dow Chemical declined to comment on Loeb's letter.

Dow's share price has climbed 12.39 percent this year and was one of the bright spots in Third Point's portfolio, Loeb said.

News in January that Loeb's Third Point had taken a position in Dow Chemical helped push the stock price higher as investors expected the billionaire investor to engage with management and push for changes. When he announced his stake in January, Loeb urged a spin off and by February Loeb had harsh words for the lack of transparency which he said made it hard to say whether the company should be split up or kept together.

Now he sounded a more tempered note, offering both praise and suggestions after having had several meetings with the company in the last months, people familiar with the talks said.

The tone stands in sharp contrast to his current all-out battle with Sotheby's where Loeb is criticizing the auction house for spending too much money and prescribing dramatic overhauls as he and two other dissident candidates are waging a proxy fight to join the 270-year old company's board.

Third Point holds about 5.1 percent of the company's outstanding shares, according to Thomson Reuters data.