HOUSTON — The impact of Dow Chemical Co.'s merger with Union Carbide Corp. should work out in the long run, but combining the two firms' massive polyethylene businesses will be Dow's biggest immediate challenge, according to an analyst at a firm that is a major Dow shareholder.
"The polyethylene business is the most problematic," Graham Copley said at the World Petrochemical Conference, hosted by Chemical Market Associates Inc. March 28-29 in Houston. "They're very different products. Dow is on the high end while Carbide is very commodity- and volume-based.
"Dow may not want to run these products together."
Copley is a senior research analyst with Sanford C. Bernstein & Co. LLC, the New York firm whose parent, AXA Financial Inc., owns 7 percent of Dow stock.
Bernstein downgraded its recommendation on Dow from Outperform to Market Performer in February. Investment firms UBS Warburg and AG Edwards have taken the same step in recent months, partly because of the effect the slowing U.S. economy could have on the firm.
Another short-term challenge facing Dow in PE could be in overlap between customers who had been buying PE from both Dow and Carbide, Copley said.
"The risk is if [customers] are worried about buying from fewer suppliers and want to buy from another PE producer," he said.
Dow PE Vice President Len Azzaro said the firm is confident it can make a smooth transition in the PE market.
"If a customer is buying Carbide product, he'll stick with buying Carbide product," said Azzaro, who spoke at DeWitt & Co. Inc.'s World Petrochemical Conference. "There's going to be few disruptions until we establish our strategy."
Longer-term, Copley sees advantages to the Dow-Carbide deal, saying the real opportunity of the merger is in Dow becoming a much more significant supplier to the household products and consumer care industries, where Dow could form partnerships in new product development.
"[Dow-Carbide] would stand out as a masterful move today if it wasn't for the high cost of energy in the U.S. and its impact on Carbide," he said. "Dow now has the distraction of how to make Carbide's basis assets profitable and the near-term dilution of buying a company with a business mix that generates losses in this environment.
"Near-term, the company may take a hit as it gives key combined customers a big hug of confidence before it has achieved the savings."