Here’s Why The Olin Deal Is a Positive For Dow Shareholders

The Dow Chemical Company (NYSE:DOW) recently announced that its proposed deal with Olin Corporation (NYSE: OLN), involving the spin off of a significant portion of its chlorine business for a total consideration of $5 billion, has achieved a significant regulatory milestone, with the expiration of the required waiting period under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976. The milestone marks significant progress towards the close of a deal, which we believe will benefit Dow shareholders greatly. Here’s why we think so. ^[1]

• Reduced Exposure To Less Profitable Businesses: The chlorine-related businesses being spun off by Dow are a part of the company’s Performance Materials division, which contributed more than a quarter to its 2014 revenue. However, the division’s adjusted EBITDA margin was just 14.9%, around 250 basis points lower than the company-wide average of 17.4%, by our estimates. Therefore, the deal essentially benefits shareholders by reducing their exposure towards less profitable, commoditized end products. ((Dow 2014 10-K SEC Filing, sec.gov))
• Tax-Efficient Transaction: As a part of the deal, Dow will spin off its U.S. Gulf Coast Chlor-Alkali and Vinyl, Global Chlorinated Organics, and Global Epoxy businesses to eventually merge with Olin Corp. in a tax-efficient RMT transaction. An RMT transaction combines a spin-off transaction with a statutory merger to allow a tax-free transfer of a subsidiary, which is a positive for shareholders. ^[2]
• Great Valuation: The merger of Olin with Dow’s chlorine operations will result in Dow shareholders receiving approximately 50.5% of the shares of Olin Corp., valued at $2.2 billion as of the close on March 25, 2015, while existing Olin shareholders will own the remaining 49.5% stake in the company. In addition, Olin will also pay $2 billion in cash and cash equivalents to Dow and take on approximately $800 million in pension and other liabilities, taking the total value of the deal to $5 billion. This is a sweet deal for Dow, since it values its rather low-growth, low-margin businesses at almost 7x trailing EBITDA, and provides for investment support to its more profitable divisions like Performance Plastics. ^[3]
• Increased Focus On More Profitable Division: The Performance Plastics division best leverages Dow’s integrated value chain for a low-cost advantage, and differentiated end products for higher margins. According to our estimates, the division’s adjusted EBITDA margin stood at around 20.3% last year, well above the company-wide average. Dow plans to direct a large chunk of the proceeds from the Olin deal towards strengthening the feedstock advantage of its Performance Plastics division in the U.S., which will benefit shareholders greatly in the long run. (See: Cheap U.S. Natural Gas Is Attracting Huge Investments From Chemical Companies)

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1. Dow and Olin Corporation Achieve Regulatory Milestone in Proposed Chlor-Alkali and Derivatives Transaction, dow.com [↩]
2. Dow and Olin Corporation Create an Industry Leader in Chlor-Alkali and Derivatives with Revenues Approaching $7 billion, dow.com [↩]
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