In a move that market watchers are calling “highly complementary to the strategic objectives of both companies” The Dow Chemical Company (DOW, Financial) has split its chlor-alkali and derivatives business from other petrochemicals, and merged chlorine operations with Olin Corporation (OLN, Financial) in a deal worth $5 billion. Through a tax-efficient Reverse Morris transaction, the two have created a company that could be the industry leader in chlor-alkali operations, tentatively valued at $7 billion.
Chemical advantages
Furthermore, the shareholders of Dow will receive shares in this merged company, which puts them in an advantaged position with commendable potential value earned in both chemical corporations. Dow shareholders stand to gain from the tax-efficient consideration of $5 billion and tax-payable value of close to $8 billion. Dow CEO Andrew Liveris is reported to have said that the target divestment value will be $7 billion to $8.5 billion have been exceeded through this Olin deal. The Midland-based chemical company was under significant pressure from its hedge fund Third Point to split the chemical and petrochemical businesses.
Trading on Friday saw Dow’s shares rise by as much as 2.8% to $47.76. Olin’s shares rose by as much as 25%.
Olin is looking at annual cost savings of at least $200 million over the next three years. This transaction bolsters Olin’s downstream chlorinated products portfolio, while placing the company at a strategic position to capitalise on its newly-acquired low-cost ECU capacity on the Gulf Coast of the United States.
Olin has catapulted to the front of the global low-cost chlor-alkali businesses line. The incremental growth from the merger with Dow’s products, processes, networks, logistics and customer base for Olin will be tremendous. The Missouri-based company has effectively doubled its scale and achieved some strategic presence in suitable geographical locations. Olin’s shareholders are yet to approve the deal, which is expected to close by the end of 2015, once approved.
The deal and beyond
The terms of the deal include Dow’s chlor-alkali and vinyl business on the Gulf Coast, global chlorinated organics and epoxy business, in turn for which Olin will pay $2 billion in cash to Dow. For the rest of the amount, Dow will receive $2.2 billion in Olin common stock and approximately $800 million in pension bonds and other liabilities. Dow shareholders stand to receive around 50.5% of shares of Olin, while existing shareholders will hold the remaining approximately 49.5%.
Dow will now be able to set in motion its transformation into a dedicated provider of differentiated products, such as ethylene and propylene derivatives, gaining high value from an integrated, innovative value chain. The agreement with Olin can be leveraged to capitalise on its integration efficiencies for chlorine to suit Dow’s key downstream processes. Unrelated to this merger, the two chemical companies have also announced a 20-year capacity rights agreement for Dow to supply ethylene to Olin. Here, Dow will be paid up-front by Olin while Olin will be supplied co-investor, integrated producer grade ethylene.
The resultant company will get an integrated ethylene supply from Dow’s production base to turn into a sustainable, integrated producer of chlor-vinyl. And the two parent companies are looking at ongoing sustainable growth from the physical integration.
