We first disclosed our Dow Chemical Company (LSE:DOW) investment in our Q4 2013 investor letter, arguing that Dow shares were significantly undervalued. We recognized a familiar pattern of a conglomerate that had grown unwieldy, pursuing a strategy of becoming bigger, not better. Accordingly, we proposed that Dow rationalize its business by separating its Agriculture and Specialty Chemicals businesses from its commodity-focused Petrochemical businesses to unlock value for shareholders, writing:
We believe the benefits from a spin-off, including financial uplift from operational improvements at Dow Petchem Co. and the potential valuation uplift from increased business focus and disclosure, far outweigh the supposed integration benefits… [with a spin] Dow could pave a path toward increased disclosure, greater management accountability for individual business segment performances, and enhanced alignment of interests between management and shareholders.
We have been engaged shareholders for nearly 4 years – adding two Board nominees as part of a 2015 settlement and engaging extensively with management regarding the optimal post-merger structure for DowDuPont. Since we initiated our position and our nominees became Board Members, Dow’s underlying business performance has
strengthened, profitability has increased significantly, and shares have doubled. Now, after the recent merger with DuPont, DowDuPont will embark on a compelling business separation that is consistent in both substance and rationale with the proposal in our Q4 2013 letter. We commend the DowDuPont board for getting to the right place for its shareholders. Today, we believe there is significant additional upside in the investment as the company heads down a familiar path.
Joel Greenblatt (Trades, Portfolio)’s How to be a Stock Market Genius is required reading for all new Third Point employees. On the topic of spin-offs, Greenblatt writes: “When a business and its management are freed from a large corporate parent, pent-up entrepreneurial forces are unleashed. The combination of accountability, responsibility and more direct incentives take their natural course.” While a significant portion of the public debate regarding spin-off structure for DowDuPont was devoted to the “multiples” the various companies would trade for, what most excites us about our DowDupont investment is the dynamic that Greenblatt describes.
Few in the corporate world understand this dynamic better than DowDuPont CEO, Ed Breen. He is renowned for executing a similar blueprint at Tyco, and we have confidence he will provide the leadership that these two storied companies need to fulfill their potential. Along with these favorable conditions, DowDuPont carries an unlevered balance sheet and retains significant M&A optionality. Yet, DowDuPont trades at just 8.6x consensus EBITDA in 2019, a substantial discount to its sum-of-the-parts when we look at the multiples of the likely comparables for the three (or more) Spin-Cos. As a result, we continue to see significant upside to our investment in DowDuPont.
From Daniel Loeb (Trades, Portfolio)'s third quarter 2017 shareholder letter.
