Diversified chemical company Dow Chemical Company (DOW) has signed an agreement to sell its non-core Powder Coatings Business to Akzo Nobel N.V. (AKZOY), a leading producer of paints and coatings, based in Amsterdam, The Netherlands. Financial terms of the transaction were not disclosed. The transaction is expected to close by the second quarter of 2010, subject to customary closing conditions, including regulatory approvals. 

Dow plans to use the proceeds from the transaction to repay debt, consistent with the company’s de-leveraging plan. Dow plans to raise about $3.5 billion by divesting its non-core assets. For the Chemicals group Akzo Nobel, the deal will bring upgraded technological expertise and significant synergy potential for the Powder Coatings business, as well as enhance the company’s position in the U.S. 

The powder coatings activities were purchased by Dow earlier this year as part of its acquisition of Rohm & Haas. Dow Chemical has become the world’s leading specialty chemicals and advanced materials company after acquiring Rohm and Haas for $16.3 billion. The acquisition appears positive for Dow, which is expected to consolidate higher margin and higher growth specialty businesses and reduce volatility in earnings and cash flow, going forward. 

Joint ventures and acquisitions are an integral part of Dow’s growth strategy. These provide access to potential markets, new technologies and feedstock, at the same time lowering capital investment and risk. Management intends to place Rohm & Haas, along with some specialty chemical businesses, in a new Advanced Materials division. The acquisition has increased Dow’s position in the Specialty Chemicals market by broadening its product range in paints, coatings and electronic materials. This new division expects to achieve annual sales of $14 billion and cost synergies of $1.3 billion. Dow’s current business profile has an anticipated growth rate of about 4% for the period 2009−2012. 

The Rohm & Haas portfolio, on the other hand, is rooted in faster growing segments with an expected growth rate ranging between 5% and 9%. On a consolidated basis, the growth rate of the combined portfolio over this period is expected to be within 5% to 7%. The merger would be neutral to earnings in the second half of 2009. However, it is likely to boost Dow’s earnings by 5% in 2010 and 13% in 2011. 

Dow is targeting faster-growing regions. The company earns two-thirds of its income from outside the U.S. Growth in emerging economies have been especially rapid, generating almost 28% of Dow’s revenues. Growth is 17% in Europe, where sales are $19.6 billion; 15% in the Asia-Pacific, where sales are $6.2 billion; and 14% in Latin America, where sales are $5.8 billion. Meanwhile, sales growth in Greater China and Eastern Europe were 24% and 30%, respectively. 

We maintain our Outperform recommendation on the stock.
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