Loeb's Third Point Puts Pressure on Dow
Loeb in his quarterly investor letter said Dow is Third Point's largest current investment, but said the company's shares have "woefully underperformed over the last decade" generating a return of 46% including dividends compared to a 199% return for the S&P 500 Chemicals index. The investor did not disclose the size of his stake, but he reportedly spent $1.3 billion amassing Dow shares.
Loeb called on the company to seek options for its petrochemical units.
"We believe that Dow would best serve shareholders' interests by engaging outside advisors to conduct a formal assessment of whether the current petrochemical operational strategy maximizes profits and if these businesses align with Dow's goal of transforming into a 'specialty' chemicals company," Loeb wrote. "The review should explicitly explore whether separating Dow's petrochemical businesses via a spin-off would drive greater stakeholder value."
In an e-mail statement, a Dow press official said the company "routinely monitors and engages with all of its shareholders, so we are very aware of our owners' positions." The official added: "We engage with all of our owners to understand their views and we welcome all constructive input with a common goal of enhancing long-term value."
Midland, Mich.-based Dow has been actively seeking to revamp its businesses. The company in 2008 kicked off a transformation aimed at shedding lower-margin units and focusing on higher-priced specialty materials by acquiring Rohm and Haas for $18.8 billion.
In the years since Dow has retained advisers to explore separation options for units totaling $5 billion in annual sales, including in December hiring bankers to sell its century-old chlorine operation. Loeb in his letter called the Rohm & Haas deal, which almost fell apart due to recession-related funding issues, "ill-timed" and said the company's underperformance is particularly notable given that the North American shale boom should be "a powerful tailwind" for Dow's petrochemical business.
Loeb said that the strategy of moving toward more specialty businesses in the petrochemical segment is "misaligned" with the current landscape.
"Over the past five years, the shale revolution in North America has led to a boom in natural gas liquids production which has dramatically reduced raw material costs, while China and other emerging market economies have aggressively grown downstream derivatives capacity," the investor said. "Perhaps unsurprisingly, our analysis suggests that Dow's downstream migration strategy within petrochemicals has not yielded material benefits so far and instead may be a significant drag on profitability."
The investor said that separating the petrochemical business would allow petro to focus on profit maximization instead of subsidizing other Dow units, while allowing the parent to accelerate its push into specialty chemicals "focused on attractive end-markets such as agriculture, food, pharmaceuticals, and electronics."