Date: 2015, April 16
Deutsch Bank-Market Research Analysists comment the strategic update that Dow made recently during its Sadara Investor meeting in Saudi Arabia on March 19, 2014 and consider that a divestiture from agrochemicals business would be a realistic possibility driven by Value Creation for Share holders.
On Wednesday, March 19 Dow CEO Andrew Liveris provided a company-wide strategic update on Day 1 of its Sadara Investor Meeting in Saudi Arabia.
Dow’s strategic update did not disappoint with CEO Andrew Liveris, for the first time, highlighting a path to the separation of Agro once it validates its target
of doubling EBITDA from $1B in ’13 to $2B in ‘17. With hybrid Agro businesses valued at 11-12x EBITDA vs Dow’s current 7.5x EBITDA multiple, a tax free
spin of Agro (the most likely option) would be, in our view, a value creating event for shareholders. We believe a tax free spin of Agro could occur in ‘17. Mr.
Liveris also increased the y/e ’15 divestiture target by an additional $1.5-$2.0B (to $4.5-$6.0B) as Dow continues to shed non-core businesses.
Strategic update: Key take aways (Extracts)
1) Q1 has been negatively impacted by severe winter weather which reduced earnings in Ag and disrupted transportation and logistics.
2) Mr. Liveris outlined a path for the separation of the $7B in sales Ag business. We believe this is due to the attractive valuations of 11-12x EBITDA being afforded hybrid crop chemical and seed businesses such as Dow’s. However, a separation will not occur until Agro is tracking towards its target of doubling EBITDA from $1B in 2013 (with 14% EBITDA margins) to $2B in 2017-2019 (with 25% margins) as at this point, adequate value would be attributed to it in a separation. Of The $1B increase in EBITDA, $300-$400MM will come from crop chemicals and $600- $700MM from Seeds (currently negative EBITDA). A tax free spin is the most likely option as a sale would result in a large tax bill.
3) Dow increased its y/e’2015 divestiture target from $3-$4B (primarily from the sale of chlorine-related commodity businesses) to $4.5-$6.0B. The $1.5-$2.0B increase is from the further shedding of non-core assets with EBITDA of ~$300MM as Dow continues its decade long journey to become a higher growth, higher margin, more focused and less cyclical company.
Positioning of Agricultural Sciences Segment
Agricultural Sciences is one of the 7 busines segments of DOW with Electronic and Functional Materials, Coatings and Infrastructure Solution,Performance Materials, Performance Plastics , Feedstocks & Energy and Others. With 7.2 Bn Us $ sales, it accounts for 12% of Dow 2013 sales.
The Agricultural Sciences segment is forecasted to reach the highest sales growth for 2014 and 2015 with 7-8% yoy vs 2-5% for other segments
The Agricultural Sciences segment generated a 13% EBITDA adjusted margin in 2013, lower than Performance Plastics (28%) and Electronic and Functional Materials (23%) but higher than Coatings and Infrastructure Solution (13%) , Performance Materials (11%) , Feedstock and Energy (8%).
Agricultural Sciences Commercialize powerful R&D pipeline
- 300-400 bps of near-term EBITDA margin opportunity
- In Crop Protection, new products deliver faster top-line growth than industry at above-average segment margins
- Acceleration of SmartStax® platform in North America and Latin America
- Achieve scale efficiencies in Seeds, Traits and Oils
- Ramp-up Enlist™ corn, soybeans and cotton
Source: Deutsche Bank Market Research - March 20, 2014
Complete docuemnt available on Performance Solution e-room