Loeb To Dow: You’re No LyondellBasell
May01

Loeb To Dow: You’re No LyondellBasell

In an investor letter, Daniel Loeb, who heads the hedge fund Third Point, a major Dow Chemical shareholder, gave his constructive critique of Dow's strategy. Dow, he says, should be earning $2.5 billion more than it currently does. The letter was by no means scathing. He praised Dow's share buyback program. He acknowledged that Dow has pledged more transparency, but he wants to see more. Specifically, he wants Dow to disclose its transfer pricing methodology between its petrochemical units and its downstream derivatives businesses. Without this, it is impossible to tell whether the Eeedstocks and Energy segment is subsidizing the Performance Plastics segment. In other words, where is the company really adding value? And overall, Loeb says, Dow isn't adding enough value. And whom does he compare Dow to? LyondellBasell: "Dow has ~30% more North American ethylene capacity, triple the Middle Eastern ethylene capacity, and more North American derivatives capacity than Lyondell, yet the two companies generate the same amount of EBITDA in their respective petrochemical businesses," Loeb wrote. (Both first have about $6 billion.) Loeb also analyzed Dow's capacity against industry average margins and probable feedstock slates to get at the $2.5 billion figure. (LyondellBasell was close to being right where it should be.) Loeb isn't a big fan of Dow's strategy of integrating its petrochemicals might with downstream derivatives. This means Dow needs more people, administrative expenses, R&D, facilities, etc. "Dow's headcount is ~2.5 times more than Lyondell's, which is not a reflection on poor efficiency, but rather that Dow is engaged in numerous downstream derivatives that Lyondell is not," he wrote. He wasn't finished. "Given Dow's decision to exit chlor-alkali, it appears that Dow believes that its Ag Chemicals and Ag Biology businesses do not derive value-add differentiation from chlorine integration. We take this one step further and question whether Dow's specialty segments need ethylene or propylene integration." Loeb makes some good arguments. The transfer pricing point to me is most intriguing. I wonder if the company squanders value by dipping into its presumed feedstock subsidies by underselling rivals. The ability to do that would strike me as a temptation that's hard to resist. I also wonder if a possible solution is for Dow to throw its U.S. crackers into an master limited partnership, like Westlake is doing. Problem solved.    ...

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Lyondell Is Out of Bankruptcy
May03

Lyondell Is Out of Bankruptcy

A little follow up: LyondellBasell has emerged from bankruptcy on Friday as planned. It has also filed a Form 10 with the SEC, a document that sheds some more light on what the new LyondellBasell will look like. From that document, we learn that Apollo Management will have the largest stake in the company with 25% of shares. LyondellBasell’s former owner Access Industries will have 7% and Ares Management will have 7%. The Royal Bank of Scotland will have an unspecified number of shares, but they will amount to more than a 5% interest. In addition, three of the five directors disclosed thus far have an Apollo pedigree, including one of Apollo’s founders, Josh Harris. The other two directors come from Access and Ares. Apollo’s other major projects in the chemicals world are the former GE Silicones unit Momentive Performance Materials and the specialty chemicals maker Hexion. I would guess that there wouldn’t be a merger between Lyondell and one of these two firms because the synergies, outside of perhaps administrative costs, would be limited. That said, the idea of combining LyondellBasell has been floated before. LyondellBasell tried to buy Huntsman before Hexion stepped in with a “better” offer that wasn’t, in the end, consummated. (Comical understatement in the last part of the preceding sentence). But LyondellBasell is the second largest propylene oxide maker in the world, after Dow. Huntsman makes propylene oxide and other polyurethane raw materials like MDI. There isn’t nearly such an overlap between Hexion and LyondellBasell. I am actually more curious about what the relationship might be with another firm that Apollo has a large stake in: Berry Plastics. That packaging maker buys billions of lbs of the kinds of plastics that LyondellBasell makes. Downstream integration is common in the vinyls world with many PVC makers also producing PVC pipe. In polyolefins, you hardly see it outside of biaxially oriented polypropylene, the plastic film that potato chip bags are made out of. Another neat observation from the document: Four out of seven of LyondellBasell’s executive officers, including CEO Jim Gallogly, came from Chevron Phillips. Incidentally, Gallogly, who has experience founding global petrochemical companies, will end up with a 1% stake in the...

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LyondellBasell Leaving Bankruptcy Behind
Apr28

LyondellBasell Leaving Bankruptcy Behind

A Manhattan bankruptcy court is allowing LyondellBasell to emerge from Chapter 11 on Friday. The company is emerging with $7.2 billion in debt, $2 billion in cash, and 2009 sales of $30.8 billion. This is a far cry from the $24 billion in debt that it had when it declared bankruptcy back in January 2009. LyondellBasell is supposed to file a Form 10—-as in 10-K’s, 10-Q’s and the like--with the SEC soon. From that document, we will see what kind of stakes Access Industries, Apollo Management, and Ares Management, as well as other creditors—ABN AMRO and so on--will get in the company. Also worth noting, Access's original equity was wiped out. It ends up with an equity stake because it had purchased bonds and got in line in bankruptcy court like everybody else. This sheds some light on why ownership of the original equity of the company was put into a joint venture with ProChemie Holding last year. For some convoluted legal reason, perhaps Access needed to form the JV to buy the bonds. We also might learn a little more about LyondellBasell's plans to go public again on the NYSE. It was one of the largest bankruptcies in recent memory. (Though, I think of LyondellBasell as more of a schooner than a sloop. And, poor Washington Mutual! It sunk before it finished loading cargo, apparently. Click on the link to get the remark.) Though, for its size, LyondellBasell is reasonably intact. There weren’t any fire sales or liquidations, and what is emerging is a company much the same as the one that filed for chapter 11. There is certainly an “Under New Management” sign on the door of its Rotterdam, headquarters, though. The bankruptcy had a couple of twists and turns. Creditors sued because they thought Access contributed to the bankruptcy by paying too much for Lyondell. (I recall an earlier shareholder lawsuit against Lyondell’s board stating that they didn’t do enough to hold out for more. There’s no satisfying some shareholders. I suspect that when Access’s $48-per-share offer came in, the reaction in the Lyondell boardroom was probably something like the locker room of a ball club that has just clinched the World Series.) The LyondellBasell bankruptcy also saw a series of dollar short/day late bids from Reliance Industries. Only a bus full of mall walkers browses without buying more than that Indian conglomerate...

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