Issue Date: February 4, 2008
Company Of The Year
Around the turn of the year, magazines put out special issues naming a person or entity emblematic of the past year. Time has its person of the year, most recently icy Russian leader Vladimir Putin. Forbes named computer graphics card maker Nvidia as its company of the year. Motor Trend named the 2008 CTS, the "best Cadillac in 50 years," its car of the year.
For the chemical industry, 2007 won't be soon forgotten. It will be known for huge deals and stratospheric oil prices and for sowing the seeds of an economic slump. A number of chemical companies are also worthy of being remembered for what they accomplished.
Saudi Basic Industries Corp. bought GE Plastics for $11.6 billion. Acquiring one of the pioneers of engineering plastics is a milestone for SABIC, which is trying to use its base as a low-cost Middle Eastern petrochemical producer to become a diversified global chemical company.
Akzo Nobel made another storied chemical name disappear. It purchased ICI in a $16.0 billion deal that will give it a more than 10% share of the global paint market. And in a second deal putting its focus on chemicals and paints, Akzo sold its Organon health care business to Schering-Plough for $16.3 billion.
Basell, through its $20.0 billion purchase of Lyondell Chemical, became the world's third-largest chemical company behind BASF and Dow Chemical. Basell had been itching for a major acquisition. In June, it inked an agreement to buy Huntsman Corp., but that deal was called off when Hexion Specialty Chemicals stepped in with a better offer.
Eastman Chemical is also worth mentioning. It will participate in two U.S. Gulf Coast projects, costing $1.6 billion apiece, that will transform coal into methanol, ammonia, and other chemicals. The plants are by far the largest chemical projects being considered in the U.S. They are meant to circumvent high prices for natural-gas-based feedstocks, the main reason no one is building big chemical plants in U.S. anymore.
Despite all these big moves, the clear favorite for "chemical company of the year" is Dow. There wasn't much Dow didn't do in 2007, the year it embarked on some of the most dramatic changes in its 110-year history.
The year began with rumors that everything would change for the company. A story surfaced that private equity firms and Middle Eastern investors were planning a $54 billion takeover. Dow's chief executive officer, Andrew N. Liveris, initially dismissed the stories as tabloid journalism. Dow later fired two executives for conspiring in back-channel talks about sale of the company.
The rumors made sense to many because Dow has been up-front about redefining itself. Indeed, as the year continued, Dow established several ventures with companies that have access to low-cost hydrocarbons and are eager to grow in petrochemicals. Its goal is to lower production costs while redirecting itself to more value-added specialty chemicals businesses.
During the year, Dow launched a plan with Saudi Arabian state oil company Saudi Aramco for the largest petrochemical project in history. Dow also became the first Western company to plan a major chemical investment in Libya.
In November, Dow agreed to develop natural-gas-based raw materials with Gazprom, the state-owned Russian firm that controls 20% of the world's natural gas production. The companies are already discussing chemical projects in Russia and Germany.
Dow was busy developing alternative feedstocks as well. Last year it launched a feasibility study with Chinese mining firm Shenhua for a complex that would convert coal into chemicals. Dow and Brazil's Crystalsev agreed to build a polyethylene plant based on ethylene derived from sugarcane-based ethanol.
But Dow saved its biggest deal for last. In December, it announced plans to sell 50% of its polyethylene, ethyleneamines, ethanolamines, and polycarbonate businesses to Petrochemical Industries Co. of Kuwait (PIC), a subsidiary of Kuwait Petroleum, for $9.5 billion.
The deal is important for its size and for its potential to make Dow's earnings less volatile. Dow's profits will no longer be at the mercy of petrochemical business cycles. Its partner, a Middle Eastern oil company with unfettered access to feedstocks, is of the ilk most likely to weather any industry downturn.
"Dow's transaction with PIC of Kuwait to form a joint venture in commodities has significance on all fronts—not only for Dow but for the entire chemicals industry," remarked Citigroup chemical analyst P. J. Juvekar, in a note to clients after the transaction.
Moreover, the transaction will set the stage for further Dow purchases. Liveris referred to the deal as the "penultimate" step in the company's transformation and said it is on the hunt for acquisitions, "no matter what the size." Analysts see it buying a large specialty chemicals company on the order of Ciba Specialty Chemicals, Cognis, or Cytec Industries. With $7 billion in cash from Kuwait in its pocket, few companies are out of Dow's price range.
"We said 2007 would be a transformational year. We meant it," Liveris told analysts in December. He says the company will be "hard at work" in 2008, closing the deal with PIC and addressing the questions, "How will we acquire? How will we invest? And how will we reward our shareholders?" Depending on its answers, Dow could well become chemical company of the year in 2008 as well.
Views expressed on this page are those of the author and not necessarily those of ACS.
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