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Dow Chemical Starts Exchange Offer for Chlorine Carve-out

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Dow Chemical recently initiated its share exchange offer for the proposed carve-out of a major portion of its chlorine value chain that has been in operation for over 100 years. This represents another important milestone in the planned transaction.

Dow, in Mar 2015, announced that it will break off a considerable portion of its chlorine value chain and merge that with chemical maker Olin Corp. (OLN - Free Report) in a deal valued at around $5 billion. Under the deal, Dow will separate its U.S. Gulf Coast chlor-alkali and vinyl, global chlorinated organics and global epoxy businesses and merge these businesses with Olin under a tax-efficient Reverse Morris Trust transaction.

The exchange offer enables shareholders of Dow to exchange their shares of the company’s common stock for shares of Blue Cube Spinco Inc. (Splitco) common stock, which will convert into shares of Olin common stock on transaction closure. Splitco is a fully-owned subsidiary of Dow. The exchange is expected to be tax-free for U.S. federal income tax purposes.

The offer provides shareholders of Dow with the option to exchange all, some or none of their shares of Dow common stock for shares of Splitco common stock. Splitco shares will automatically convert into the right to receive 0.87482759 shares of Olin common stock at the completion of the merger of an Olin subsidiary with Splitco.

Dow shareholders are expected to get roughly $1.11 of Splitco common stock for every $1.00 of Dow common shares tendered and accepted in the offer, subject to an upper limit. The upper limit will be of 2.9318 shares of Splitco common stock equivalent to 2.5648 shares of Olin common stock for each share of Dow common stock tendered and accepted in the offer.

Dow, which will determine the ratio at which the shares will be exchanged under the offer, is expected to issue 100 million shares of Splitco common stock in the exchange offer. The number of Dow shares that will be accepted in the offer will depend on the final exchange ratio and the number of Dow shares tendered.

The exchange offer will lead to a reduction in the number of Dow’s outstanding shares. Splitco common stock will not be transferred to participants in the offer. Instead, such participants will get shares of Olin common stock in the merger.

Following the completion of the exchange offer, a special purpose merger subsidiary of Olin named Blue Cube Acquisition Corp. will be merged with and into Splitco with Splitco surviving as a fully-owned subsidiary of Olin.

If the exchange offer is not fully subscribed after its completion, the remaining Splitco shares owned by Dow will be distributed on a pro rata basis to Dow shareholders whose Dow common stock remains outstanding after the completion of the offer.

Dow’s shares rose around 1% to close at $42.83 last Thursday. Its shares are down roughly 19% over a year.

Dow, in Jul 2015, secured a favorable private letter ruling from the U.S. Internal Revenue Service (“IRS”) with regard to the chlorine deal, allowing it to attain tax efficiency for the transaction. Dow also received the U.S. antitrust clearance for the deal in June.

The transaction is now subject to clearance by Olin shareholders and completion of customary closing conditions. Olin has scheduled a meeting of shareholders on Sep 15 to approve the issuance of its common stock. Following the merger, roughly 52.7% of the outstanding Olin shares are expected to be held by pre-merger holders of Splitco stock with the balance is expected to be retained by pre-merger holders of Olin common stock.

The disposal of the chlorine assets represents a significant part of Dow’s aggressive portfolio management actions as it is looking to move away from cyclical commodity chemicals businesses. Dow is selectively spinning off or selling its underperforming assets and gradually shifting to high-growth markets.

With its announced divestiture transactions, Dow expects to raise more than $11 billion from asset sales by mid-2016. This will enable the company to continue focusing on reducing debt and invest in future growth of its high-margin businesses.

Dow is a Zacks Rank #3 (Hold).

Better-ranked companies in the chemicals space include Innospec Inc. (IOSP - Free Report) and Air Products & Chemicals Inc. (APD - Free Report) . While Innospec retains a Zacks Rank #1 (Strong Buy), Air Products holds a Zacks Rank #2 (Buy).

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