Hedge Fund Buys Into Dow, Recommends Petchems Spin-off

New York-based $14 billion hedge fund Third Point has acquired a sizeable stake in Dow Chemical, and reports from the U.S. suggest the fund's chief executive Daniel S. Loeb is preparing to stir up the already choppy waters at the chemical behemoth.

While Third Point did not disclose the extent of its Dow shareholding, based on the fact that the fund said the chemical company is now its largest position - exceeding its investment in Yahoo of at least $500 to more than $600 million - stock market experts place the value of the package at up to $1.3 billion.

Early last year, Dow CEO Andrew Liveris announced plans to divest underperforming assets worth $1.5 billion, in October upped the ante to $3-4 billion and in December to $5 billion. Nevertheless, it seems Loeb may consider the scheme too timid.

In its quarterly letter to investors, Third Point called on Dow to hire outside advisers to review its business strategy with an eye to spinning off petrochemicals into a separate entity. The fund argued that Dow's stock price has declined successively since Liveris took over as CEO in 2005, gaining only 46% over the past decade, while the S&P Chemicals 500 index has added 199%.

In particular, Third Point blamed the "ill-timed" $16.5 million acquisition of Rohm & Haas for the company's "poor operational performance." It said Dow's comparatively weaker performance is "even more surprising, given that the North American shale gas revolution has been a powerful tailwind for Dow's largest business exposure, petrochemicals.

"Dow's strategy has been to specialize downstream at a time when the boom in natural gas liquids has "dramatically reduced raw materials costs," the fund said, adding that this approach "seems misaligned with the changed landscape." The company's downstream migration strategy within petrochemicals has not yielded material benefits so far and instead may be a significant drag on profitability," it suggested.

Comparing Dow's aggregate petrochemical capacities and product margins and comparing its profitability with that of pure-play peers suggests that the upside from both-cost cutting and operating optimization could amount to several billion dollars in annual EBITDA, the fund argued.

"We believe Dow should apply the intelligent logic of its recently announced chlor-alkali separation to the entirety of its petrochemicals businesses by creating a standalone company housing its commodity petrochemicals segments (Dow Petchem Co.)," said Third Point. It added that the remaining assets of the company, which it called "Dow Specialty Co.", would be the specialty chemicals leader management has aspired to become over much of the past decade.