Dow Pushes Divestiture Agenda To Improve Profits And Growth Prospects
As part of its ongoing portfolio shake-up activities, The Dow Chemical Company (NYSE:DOW) announced its intentions to divest two of its non-core businesses, Plastic Additives and Polypropylene Licensing and Catalysts, that are currently part of the Performance Plastics and Materials division. The company is targeting divestment of around $1.5 billion over the next year and a half. [1]
The plastics additives business manufactures additives that are used for processing and modification of thermoplastic and thermosetting plastic materials. These are primarily used in the building and construction, consumer goods, electronics, packaging and transportation industries. This unit contributed around $585 million in sales during 2011. [2]
The polypropylene licensing and catalyst business on the other hand generates licensing revenues by enabling customers to improve their polypropylene manufacturing capabilities. Dow sold its own polypropylene manufacturing business in 2011 to Braskem SA in 2011 for $474 million so it makes sense for the company to divest the licensing business as it would not reap direct benefits from research and development efforts to build new technologies in this field.
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This divestiture announcement is in-line with Dow’s restructuring plans aimed at focusing on its core businesses. It would help the company focus on its core businesses that have higher profitability and growth prospects. We expect the Performance Plastics and Materials segment EBITDA margins to be positively impacted by this move. We currently expect adjusted EBITDA for this segment to increase from around 13.8% to 16% over the forecast period led by the highly integrated plastics business and the divestiture of non-core businesses.
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These divestitures will help Dow lower its cash outflow while helping it meet its capital expenditure target of $2 billion for the year down form $2.6 billion in 2012. However, the volume and revenue figures on the top-line would be negatively impacted while the impact on earnings could be either positive or negative depending on the sale price of these assets. Although Free Cash Flow to the Firm (FCFF) would be impacted negatively as well cash inflow from the divestiture will help reduce the net debt figure.
We currently have a $33 price estimate for The Dow Chemical Company which will be updated for the impact of these divestitures on our valuation analysis once the assets sale details are out.
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