Dow Chemical Co.'s polyethylene, polypropylene and polycarbonate assets just got a whole lot lighter.
The Midland, Mich.-based plastics and chemicals giant is selling half of its PE, PP and PC assets to state-owned Petrochemical Industries Co. of Safat, Kuwait, in a $9.5 billion deal that will create a global petrochemicals joint venture. It's the biggest move to date in Dow's ``asset-light'' strategy.
The as-yet unnamed joint venture will be headquartered in the United States and will have more than 5,000 employees at almost 30 plants worldwide. The venture - with estimated annual sales of $11 billion - will combine Kuwait's feedstock resources as a top 10 energy/ hydrocarbon company with Dow's technology and market position, including its top position in PE.
The deal is scheduled to close in the second half of 2008. The two companies already are linked in three petrochemical joint ventures, including ones that produce PE and PET. Those joint ventures - Equate Petrochemical Co., Equipolymers and MEGlobal - are not included in the deal.
The deal also includes ethylene crackers dedicated to PE production in Fort Saskatchewan, Alberta; Bahia Blanca, Argentina; and Tarragona, Spain. Other products included are ethyleneamines and ethanolamines.
``For Dow, this marks an important milestone in our transformational strategy, growing our basic businesses through joint ventures; reducing our capital intensity; and freeing up cash to invest in our portfolio of performance and market facing businesses,'' Dow Chairman and Chief Executive Officer Andrew Liveris said in a Dec. 13 news release.
At PIC parent Kuwait Petroleum Co. CEO Saad Al-Shuwaib said: ``The joint venture will enable PIC to expand and diversify its international petrochemical presence while building on our long-standing relationship with Dow.''
Dow ranks as the world's largest producer of low density PE (with 3.9 billion pounds of annual capacity) and of linear LDPE (at 9.9 billion pounds). In high density PE, the firm ranks third, with annual capacity of about 4 billion pounds.
In North America, Dow holds 11 percent of the HDPE market, 19 percent of the LDPE market, 39 percent of the LLDPE market and 6 percent of the PP market, based on estimated 2007 sales. The firm also has a share of about 10 percent in North American PC capacity, ranking third in the region.
No geographical breakdown of the proposed joint venture's sales or employees was available.
The deal met with a positive reaction on Wall Street, where Dow's per-share stock price jumped almost 7 percent to $44.48.
In a note to investors, stock analyst Kevin McCarthy said his firm - Banc of America Securities LLC in New York - is ``encouraged by continued portfolio transformation via Dow's asset-light strategy, and applaud the deal announced today.''
Dow's previous dealings with Kuwaiti firms played a role in the deal, officials said.
``We've got a good track record with Kuwait,'' Dow spokesman Chris Huntley said. ``We have a very valuable relationship, and this is the next chapter of that relationship.''
The Dow-PIC deal also was praised by industry consultants Gus Garrett and Roger Young, both of whom had lengthy careers at Dow.
``This is a wonderful move,'' said Garrett, who spent 37 years with the firm. ``In polyethylene, polypropylene and polycarbonate, those businesses will be able to look past quarterly results. They can be more autonomous and there won't be as much second-guessing.''
In the joint venture, the PE, PP and PC businesses now ``can make decisions on production without someone looking over their shoulders,'' added Garrett, who's now with Resin Technology Inc., a resin-buying consultancy based in Fort Worth, Texas.
``The asset-light concept is the way for petrochemical companies who are not back-integrated to survive,'' said Young, who is with Robert Eller Associates LLC in Akron, Ohio. ``It's the shift of all the production to companies with integrated feedstock streams.''
``The GE [Plastics] sale to [Saudi Basic Industries Corp.] was similar in that it formed an integrated raw-material stream that will bring the profitability back to the GE Plastics business,'' added Young, who spent 18 years with Dow.
``Look at this to continue on a large scale across the supply chain. When raw materials constitute such a large percentage of the cost of their plastics, integrating back in to the raw-material stream is one of the major ways today to capture value,'' he said.