Dow Chemical Co (DOW) To Focus On Higher Margin Products
Dow Chemical Co (NYSE:DOW) disclosed that it would spin off a major part of its chlorine business to Olin Corporation (NYSE:OLN), a small chemicals manufacturer. The transaction will be through a cash and stock agreement, worth approximately $5 billion. The company has been producing chlorine for over a century, since founding. However, the current move is said to be to keep away from the chlorine unit.
Dow Chemical Co (NYSE:DOW)’s efforts are part of a wider shift to focus on high margin products, compared to the increasingly commoditized business of transforming oil and natural gas to basic chemicals. Since December 2013, the company indicated its plan to sell the chlorine business. Its executives, as well as Olin Corporation (NYSE:OLN), have been discussing an agreement since then, which culminated only now.
Once the sale is completed, current shareholders of Dow Chemical will represent a 50.5% stake in Olin, while the rest of the holding will be represented by Olin shareholders. This type of spin-off-merger integration is gaining traction, since more companies want to take advantage of tax-free benefits to divest unwanted segments. This type of deal is called a Reverse Morris Trusts.
Dow Chemical Co (NYSE:DOW) will get $2.2 billion of the $5 billion agreement in cash, while Olin Corporation (NYSE:OLN) stock worth $2.2 billion will also be issued to Dow. The remaining $800 million will be assumed by Olin for pension and other liabilities.
Pressure On Dow
Since early 2014, Third Point LLC, a hedge fund firm, has been pressuring Dow to allow a spin-off rather than get involved in restructuring, which it had already done. In November, the chemical firms agreed to make peace with the activist investor by nominating two of its nominees as Directors, along with two other nominations proposed by the company as Independent Directors.
Dow Chemical Co (NYSE:DOW) CEO, Andrew Liver, said that the current agreement puts the divestment target anywhere between $7 and $8.5 billion in non-strategic businesses. It will also ensure that there is a guaranteed regular supply of low-cost chlorine for its other businesses.
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