Dow is offically no longer a commodity chemical company after April 1. 70% of 2008 EBITDA will be from specialty products. This will cause immediate PE expansion from high single digits that commodity producers tend to have the mid to high teens the specialty ones enjoy to to their more consistent earnings. Dow will be cash flow positive in 2009 and have the term loan used to settle the transaction paid off withing the year.
Interestingly enough, only $4.3 billion of the loan reduction will come from asset sales. Remember Dow was looking at $9.5 billion from the Kuwait JV that Kuwait bailed on essentially at the signing. Let's also not forget that Dow is entering arbitration with Kuwait over damages in the case. Dow has said in the past they are owed the $2.5 billion breakup fee in the deal. There is also a scenario is which Kuwait decides to renter talks with Dow for some of the businesses they were originally suppose to buy. Neither of these scenario's are baked into current projections yet are very real possibilities.
But lets look around. Negativity is everywhere. Few would question the operational ability of the combined entity and the global powerhouse it now is. But, management at Dow does have a real credibility problem. For the price paid for this deal, to the failed Kuwait JV and the dividend cut, investors are left wondering "what's next?".
That is going to be a bit of a cloud over the company until they can report some positive news. We need some unexpected good news, not bad. Yes, I know that Rohm & Haas is a one of a kind company and that Dow's was not even the highest offer in the auction for it. Yes, I know Dow had no control over the Kuwait decision. Yes, I know that the dividend cut had to happen and were it not for the Kuwait decision, would not have happened. I know all this and all of it is true.
Knowing that does not change perception, it helps us rationalize the bad news. We need something to happen we do not expect that is good. I want to hear they win in arbitration and are awarded $1 billion plus. I want to hear the global de-stocking that happened in Q3 is over and orders and pricing are firming at a faster than expected pace. I want to hear that Kuwait has come back to the table or Sabic (Saudi Basic Industries) want the commodity business and the proceeds are far more than currently projected. I want to hear that because of any of these the dividend is going to be partially restored. We see the projection for debt reduction, come back to us in 6 months and tell us you are ahead of pace paying off the bridge loan.
Any of these will tell investors that the rationalizing the bad news was not insane but logical and that the events that happened could not be avoided. More bad news tells us that perhaps management is not taking into account various alternative scenarios when planning or if they are, not putting enough stock in them possibly happening and not preparing appropriately for them.
I see one of two books being written about Dow CEO Andrew Liveris down the road. One is about how the global slowdown forced a poorly planned merger on the company and eventually cost him his career. The other is a book about how he deftly managed the company through the worse economic conditions in over 80 years, completed the merger and created the world's preeminent specialty chemical company accomplishing the vison he had when he took it over. Either one could be written now. We are at the proverbial fork in the road.
Personally, I am rooting for the second one...
