How High Could Dow Chemical Really Fetch?

A British tabloid called the Daily Express was the one yesterday that reported private equity firms KKR, Blackstone, and Carlyle are considering a $60.00 buyout offer for Dow Chemical (DOW-NYSE).

The market cap as of the close on Friday was $41.25 Billion and as of this morning with the shares up 6% at $46.35 lists a $44.5 Billion buyout.  DOW is definitely not too expensive by most metrics, but would it have taken $60 to acquire it had the news (actually rumors) been leaked?  It carries a 3.5% dividend and carries a 12.15 P/E AFTER the 6% gain today.  It is more than twice the size of Air Products (APD-NYSE).  It trades at 4.5 times book value, which is not high for the industry at all, and profit margins run in the 8% area (average for the sector).

A $60.00 buyout would put this at an all-time high and would eclipse the mid-$50’s highs seen in early 2005.  This would also represent a 70% gain for some of the smart money that piled into this stock last summer.  One thing to ask is just how many of these buyout deals are really morefor size than they are for rationale.  The price of poker just went up,and this is not even 48 hours within the announcement of the record LBOthat TXU (TXU-NYSE) is commanding. 

We ran our own break-up valuation on DOW back on February 8, 2007 when the stock was $41.84 and we came up with a theoretical value at the time of $52.50.  The stock has now covered Half of the distance to our theoretical break-up value.  Can it go higher? Sure. Can it fall apart? Sure.  $60.00 is a far cry above our viewpoint, but one must always remember that some assets can always be viewed as more valuable to some buyers than they are to someone without their own skin in the game.

We should also point out that this UK publication is considered a tabloid and is not supposedly known for its merger speculation and buyout scoops.

Jon C. Ogg
February 26, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.