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Breaking chemical bonds

10 March 2014 By Kevin Allison

Andrew Liveris may find it harder to keep Dow Chemical together now that a smaller rival is planning to break up. The Dow boss has resisted activist hedge fund manager Dan Loeb’s campaign to split the $60 billion company into separate petro- and specialty chemicals groups. Competitor FMC’s decision to hive off its agriculture and pharma businesses from stodgier commodity minerals should create a more valuable company. The voluntary split makes it harder for Liveris to argue why he’s resisting activist pressure to do the same.

There are decent parallels between the two companies. While $10 billion FMC is dwarfed by Dow in market cap, they both sport specialty chemical businesses. The better operating margin and revenue growth here is being overshadowed by a decent but weaker performance in minerals at FMC and petrochemicals at Dow.

The two companies also trade below their best-performing peers – Dow at 16 times and FMC, before today’s announcement, at around 17 times consensus earnings estimates for this year. Monsanto, by contrast, which deals purely with agriculture, sports a multiple of 20 times expected earnings.

Applying that performance to FMC’s newly independent ag business, while keeping minerals on the current multiple, would yield some 18 percent in extra value to shareholders. It’s not the biggest jump, but the two separate companies could prosper from being more focused on their respective products than combined.

Granted, FMC may be a cleaner breakup story. A key plank of Dow’s defense is that the company benefits from an integrated supply chain, with commodity petrochemicals often serving as building blocks for higher-margin specialty products. It’s harder to see such synergies at FMC. Its main minerals – lithium, used in batteries, and soda ash, used in glass manufacturing – have little to do with pesticides and drug capsule coatings.

Still, it’s tougher for Dow to argue against a breakup when a rival with similar growth businesses is doing the same. Liveris may manage to keep Loeb at bay for now. FMC’s stock market performance after its split, though, could make a potentially uncomfortable yardstick for measuring the Dow boss’s judgment.


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