NEW YORK (Reuters) - Speculation this week that Dow Chemical (DOW.N) may forge a link with India’s Reliance Industries Ltd. (RELI.BO) came as no surprise to analysts, who expect the U.S. company to move soon on its strategy to shift toward specialty products.
The Times of India on Friday said Reliance is close to signing a deal to establish a $20 billion joint venture that would include Dow’s basic chemicals and plastics business.
Neither Dow nor Reliance would comment on the unsourced report, which came just days after a British newspaper reported that buyout firms were readying a takeover bid for Dow worth $54 billion.
Analysts said Dow is likely to split off the basic chemicals and plastics business as part of what it calls its “asset light” strategy, which would give it a more nimble and higher-margin profile focusing on specialty chemicals.
“This is the time; there’s so much pressure,” said Hassan Ahmed, an analyst with HSBC. “So Dow management has a gun to their head to do something.”
Dow said it is involved in many different negotiations but would not comment on any specific talks.
“Right now we are examining more than 60 potential (merger and acquisition) deals,” said Chris Huntley, a Dow spokesman.
“Joint ventures are at the heart of our asset-light agenda,” he added. “We are continually talking to all manner of companies, big and small, as we assess the value to Dow of those companies.”
Under the terms of the possible deal cited in the Times of India, Reliance would pay about $12 billion into a joint venture, with the remainder coming from Dow.
If the report is true, then the $20 billion joint venture would probably not include all of Dow’s basic chemicals and plastics business, which had 2006 revenues of $23.6 billion, according to the Buckingham Research Group.
With the strength in those markets currently, a move into a such a joint venture might not be optimal for Dow, an analyst at Buckingham said.
“If you are selling at the peak, even though you are getting a good price, you are losing a lot of earnings,” the analyst said.
Dow could take a cash boost from a joint venture and increase its current $2 billion share buyback program or boost its dividend.
The company’s stock has rallied 13 percent so far this year to $45.20 per share on speculation some type of deal is in the works. It could see further upside, especially if it can close a deal on the terms stated in the Indian newspaper.
“I think if that happens, we can see the stock go north of $50,” HSBC’s Ahmed said.