Shareholders Love the Dow-Olin Deal!
As I pointed out last week, activist investors will continue to use historically low interest rates and the Fed’s indecision to compel corporate boards to spin off various asset classes.
For them, the end game is always to boost shareholder value. And we witnessed their latest victory on Friday.
You see, a prominent hedge fund was able to coerce a world-renowned chemical plant to sign on the dotted line…
A Reverse Morris Trust allows a parent company to dispose of unwanted assets without having to pay taxes on any gains from those particular assets. First, the parent company (Dow Chemical) must create a subsidiary (chlorine-alkali business) to merge with a smaller external company (Olin).
Next, the company created from the merger must hand over more than 50% of the economic value and voting rights back to the parent company. The overall result is transferred assets to a smaller external company (tax free).
Friday’s tax-advantaged deal has an enterprise value of roughly $5 billion and includes a $2-billion payment to Dow Chemical, along with approximately $2.2 billion in OLN stock. Olin will also assume about $800 million in Dow pension liabilities.
Under the agreement, 50.5% of Olin’s stock will go to DOW shareholders, while current Olin shareholders get the remaining 49.5%.
In terms of stock price reaction, the news benefited both companies, although Olin shares moved significantly more than the Dow Chemical shares.
The chart below illustrates the spike in OLN shares, which rose by 14%, or $3.81 per share, to close just under $31.
DOW shares rose much more modestly, closing the trading session at $47.76 (more than 2.8% higher).
Olin’s Revenue Triples!
The deal transforms Olin in a significant way.
While total 2014 revenue for Olin was $2.24 billion, the transaction will generate about $7 billion in annual revenue for the company. Meanwhile, its pro-forma earnings before interest, taxes, depreciation, and amortization (EBITDA) will grow from $340 million in 2014 to just over $1 billion post-merger – with operations in nine countries.
Additionally, OLN expects to extract more than $200 million in annual synergies and cost savings from the deal, which should close in late December 2015.
So it comes as no surprise that Olin CEO Joseph D. Rupp called the deal “a natural fit to our strategic objectives – creating a sustainable, long-term growth platform and enhanced shareholder value.”
The Next Move for Shareholders…
The sudden price spike is unmistakable evidence that shareholders and investors alike approve of the deal.
With Olin’s relatively low debt-to-equity ratio of $0.66, the use of debt to fund a portion of the deal should have a minimal impact on the company’s balance sheet.
But the increase in revenue will have a positive impact on Olin, which saw its 2014 revenue decrease more than 10.8% from 2013’s $2.51 billion.
And the expected income gains will help reverse a pattern of declining earnings per share the company experienced in 2014. At the time, income from continuing operations was $105 million ($1.32 per diluted share). Compare that to the $178.6 million, or $2.21 per diluted share, reported in 2013.
The stock currently trades at an enterprise ratio of $7.89, which means shares are attractively priced, despite Friday’s rise. However, investors would be well cautioned to average into OLN shares only on weakness.