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DOW Divests Styron Business

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Dow Chemical Company ([url=]DOW[/url]) has recently announced the divestiture of the Styron business to a private equity firm, Bain Capital, for a total of $1.63 billion. As a part of the sale agreement, Dow Chemical has an option to purchase 15% of the equity of Styron. The transaction, which is expected to close in August 2010, also includes several long-term supply and purchase agreements for Dow’s downstream businesses.

The Styron businesses were part of the Basic Plastics and Performance Products segments including products like Styrenics - Polystyrene (PS), acrylonitrile butadiene styrene (ABS), styrene acrylonitrile (SAN) and expandable polystyrene (EPS), Emulsion Polymers (paper and carpet latex), Polycarbonate (PC) and Compounds & Blends.

Polycarbonate is an engineering thermoplastic used in applications such as optical media, electrical and lighting. Styrenic plastics (polystyrene, ABS, and SAN) find applications packaging and food service, portable appliances, consumer electronics, automotive and building and construction. Expandable polystyrene is typically used in rigid foam products such as heat insulation, packaging, impact sound insulation and drainage. SB and SA Latex are used in the paper/paperboard and flooring applications.

The business also includes Synthetic Rubber and Automotive Plastics including PULSE™ engineering resins, MAGNUM™ acrylonitrile butadiene styrene, INSPiRE™ performance polymers, and VELVEX™ reinforced elastomer.

Synthetic rubber is used in a broad portfolio of products from tires to hoses, conveyor belts, and footwear to specialized high performance elastomers. Automotive plastics are used in many different automotive applications, such as instrument panels, mid consoles, door panels, interior trim, seat structures and bumpers.The business includes Dow Chemical’s 50% share in the styrene-PS joint venture formed with Chevron Phillips in 2007.
Styron will become a standalone chemicals and plastics company that serves customers in automotive, appliances and packaging industries. In 2009, this business posted $3.5 billion in revenues and 8% in EBITDA margins. The styrene industry has been showing weak margins over the past few years on tepid demand and an oversupply of styrene monomer.

The sale of the Styron business is part of Dow Chemical’s effort to reduce debt and shed its non-core assets that no longer contribute to growth resources inside the company. We believe the divestiture of this low-margin, slow-growth business and the use of proceeds to reduce Dow’s sizable debt load are positives.

The deal is another major step in Dow’s portfolio transformation strategy to reduce earnings volatility and focus resources on higher-margin, higher-growth specialty & performance assets to drive a powerful earnings recovery in coming years.

Since March of last year, Dow Chemical has announced and closed several divestitures -- Morton Salt, TRN refinery and SEA olefins, calcium chloride, powder coatings businesses, carbide emulsion plant, CE acrylic plant and Styron (total value of over $5 billion). Dow Chemical still expects to divest roughly another $2.0 billion of assets that do not fit with its long-term growth profile.

We also believe that Dow Chemical will continue to focus on its Basic Plastics business, which could generate between $4.5 billion and $6.0 billion. We have reaffirmed our Neutral recommendation on Dow Chemical.

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