The Associated Press is reporting that Dow Chemical Company (NYSE: DOW) will sell a 50% interest in five of its global businesses to a Kuwaiti company, Petrochemical Industries Co, for about $9.5 billion to form a new petrochemicals joint venture.
The joint venture will be based in the U.S. and will employ more than 5,000 people worldwide, mostly current Dow employees and will be 50% owned by Dow and PIC.
This will put cash in play that can be used for a wide range of activities. Dow may choose to slash long-term debt, which this tidy sum would eliminate almost entirely. It also may choose to expand other ventures that have a promise of higher returns or diversify into businesses that are less dependent on oil as feedstock and thereby increase potential growth while reducing volatility.
I thought 2007 was going to be the breakout year for Dow. It has done well this year, but not spectacularly. I was already considering it for 2008, but this new development adds some intrigue. It meets my criteria for consideration based on common metrics. In partnership with Corning (NYSE: GLW), Dow is developing materials for the solar energy industry. Dow has been mentioned in merger and acquisition rumors all year and now it's happened. It has historically been an innovator willing to spend on R&D. If oil goes down in price, the primary ingredient in many of Dow's products will create improved margins. A P/E of 10 and a 4% yield, need I say more?
Well there is a little more. I would like to see Dow use its expertise to develop new "green technologies" and focus on businesses related to environmental clean-up. That's going to continue to be big business everywhere.
So far, it seems that Wall Street, too, seems to like this development and shares of DOW are up 7.78%, or $3.25 to $45.00, in the first hour of trading.
To verify my track record, including bad calls, read Chasing Value and Serious Money.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.
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