UPDATE 1-Loeb's Third Point takes Dow Chemical stake, urges spinoff

Tue Jan 21, 2014 11:42am EST

By Svea Herbst-Bayliss and Ernest Scheyder

Jan 21 (Reuters) - Activist investor Daniel Loeb has taken a major stake in Dow Chemical Co, urging the largest U.S. chemical maker by revenue to spin off its lucrative but slow-growing petrochemical unit and focus on specialty materials.

A spinoff would follow a pattern set by rival DuPont, hiving off mature basic chemical businesses, which typically make plastics and paint, to focus on agriculture, electronics, foams and other niche areas.

News of the investment by Loeb's $14 billion hedge fund firm, Third Point, sent Dow Chemical shares up more than 7 percent in Tuesday morning trading.

Dow Chemical is now Loeb's largest investment, according to a letter from Loeb to investors seen by Reuters. That means the Dow investment exceeds $1 billion, the amount he paid for a stake in Japan's SoftBank Corp, announced last November. Loeb's letter did not specify the size of his stake in Dow Chemical.

A spokeswoman for the New York-based hedge fund declined to comment.

Loeb, known for talking tough with corporate executives, said Dow Chemical's stock price has returned only 45 percent over the last decade, while the S&P Chemicals 500 Index has gained 199 percent.

The investor said Dow Chemical's "weak performance" came at a time when most of the U.S. petrochemical sector has flourished, thanks to the North American shale gas revolution. He blamed the company's shortcomings on its "poor operational track record" and an "ill-timed" acquisition of Rohm & Haas in 2009.

Since Dow Chemical CEO Andrew Liveris took the helm in November 2004, its shares are down nearly 5 percent as of Friday's close, compared with sharp gains for shares of DuPont, BASF and other rivals.

"We believe that Dow would best serve shareholders' interests by engaging outside advisers 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 in the letter dated Jan. 21.

Loeb made no mention of whether he had approached the company with his ideas. He often informs his investors first about a new position and publicizes his ideas about how the company could revamp itself to deliver more value to shareholders.

Hedge fund industry analysts say that strategy often helps him achieve his goals, including at Yahoo where a very public campaign to shake up management eventually allowed him to handpick Marissa Mayer for the top job.

Midland, Michigan-based Dow Chemical said in response to a request for comment that it constantly reviews its operations "at the management and board level to increase our shareholder value and competitiveness."

The company said it does not comment on conversations with shareholders.

"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," Dow Chemical spokeswoman Rebecca Bentley said in an email.

Loeb, whose moves are widely followed in the hedge fund community, is currently attending the World Economic Forum in Davos, Switzerland, where he could cross paths with Liveris, who is also attending.

Third Point has been one of the industry's best performers for several years thanks to prescient bets on Greek bonds, Japan's economic recovery and blue-chip U.S. stocks. In 2013, Third Point's flagship portfolio gained 25.2 percent.

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