Dow Gearing Up to Divest

Dow Chemical Company (DOW - Analyst Report) is planning to sell more non-core assets in 2010 to pay off debt from its $16.5 billion acquisition of rival Rohm and Haas in April of this year. It is planning further debt reductions of about $12 billion. Dow stated that it plans to lighten its debt load and achieve its financial targets ahead of schedule.

The Rohm and Haas acquisition is proving to be positive for Dow, which is expected to consolidate higher-margin and higher-growth specialty businesses and reduce volatility in earnings and cash flow, going forward. Dow is aiming to nearly double margins and quadruple earnings per share while reducing debt in the coming years.

The company has predicted earnings of $4 to $4.50 per share in 2012 (up from last year’s $1.82) to be achieved through a mix of growth synergies as well as restructuring and cost synergies. The company had achieved cost synergies of over $1 billion in the first nine months of 2009. Earnings of 24 cents in the third quarter of 2009 (significantly better than the Zacks Consensus Estimate of 9 cents and 5 cents reported in the previous quarter) were primarily driven by cost reduction and asset sales.

The new business structure is expected to drive Dow’s revenue by more than 10% per annum. Dow expects a greater focus on emerging markets including Southeast Asia, India, Latin America, China and Eastern Europe to contribute about 35% to total revenues in 2012. Management has also projected EBITDA margin expansion from 12% in the recent past to 20% over time.

Recently, Dow divested its Powder Coatings business to Akzo Nobel N.V. (AKZOY - Analyst Report) - a leading producer of paints and coatings, based in Amsterdam, The Netherlands - for an undisclosed amount. Including this deal, Dow stated its divestiture activities to be on target to yield more than $3.5 billion in gross proceeds. The company is also planning to divest its Styron business next by the first quarter of 2010. As a part of its restructuring plan, Dow plans to divest 10 to 15 other businesses, which range in size between $100 million and $300 million in annual revenue.

Dow is also likely to benefit from cutting its stake in its basic chemicals business as part of its plan to focus on its more profitable Specialty Chemicals business. Recently, Dow had announced that its subsidiary Kow Kokam LLC acquired nearly all assets of lithium rechargeable battery maker Kokam America Inc. The company also announced the transfer to Dow of collective assets from High Power Lithium, a company focused on the development of technology for use in all lithium ion batter applications. Terms of neither agreement were disclosed.

We have upgraded Dow Chemical Company from Neutral to Outperform.

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