Dow to Break Away Chlorine Value Chain, Merge with Olin - Analyst Blog
The Dow Chemical Company DOW announced that it will divest a considerable portion of its chlorine value chain and merge that with Olin Corp. OLN in a deal valued at about $5 billion. Dow will carry out the deal under a tax-efficient Reverse Morris Trust transaction.
The transaction includes $2 billion in cash to be paid to Dow and Olin shares worth about $2.2 billion, with Olin also assuming about $800 million in debt. The companies believe they will be able to extract at least $200 million in annual synergies and cost savings from the deal. With the merger, Dow shareholders will receive about 50.5% Olin shares, with existing Olin shareholders owning approximately 49.5%.
Once the merger is complete, Olin will become an industry leader in chlor-alkali and derivatives. The company will benefit from a number of complementary businesses, and a diverse portfolio. Moreover, Olin will have a strong capital structure and cash flow to support growth and return of capital to shareholders along with around 6,000 employees at 29 operating sites in 9 countries.
The cost synergies from the deal will include network optimization and enable both Dow and Olin to expand their presence in additional places, catering to more customers. Annual revenues of the combined business are expected to be roughly $7 billion and earnings before interest, tax, depreciation and amortization (EBITDA) is expected to be $1 billion on a 2014 pro forma basis, excluding synergies. The transaction is subject to a vote by Olin shareholders and is expected to close by year-end 2015.
Further, Dow also entered into a 20-year long-term capacity rights agreement with Olin, wherein it agreed to supply ethylene to the latter. As per the agreement, Dow will receive up-front payments and, in return, Olin will receive ethylene at co-investor, integrated producer economics. The agreement is additive to the financials outlined above for the chlorine value chain transaction.
The combined company will use an integrated supply of ethylene from Dow’s production grid on the U.S. Gulf Coast to be a sustainable, integrated chlor-vinyl producer. The agreement will create a long-term growth platform and generate significant shareholder value for the companies. Dow stated that it has created a platform for success for Olin, driven by the benefits of greater scale, premier low-cost assets, an upgraded and diversified product mix, and valuable network and other synergies.
With the transaction, Dow will exceed its target of divesting $7 billion to $8.5 billion of non-strategic businesses and assets. This will enable the company to continue focusing on reducing debt and invest in future growth of its high priority and high margin businesses.
Dow currently carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the diversified chemical space include Asahi Kasei Corp. AHKSY and Innospec Inc. IOSP. Both Asahi Kasei and Innospec sport a Zacks Rank #1 (Strong Buy).
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