Dow looks ahead as sole owner of Dow Corning

MIDLAND, Mich.—Dow Chemical Co. and Corning Inc. have signed definitive agreements to restructure the ownership of their silicone joint venture Dow Corning Corp., with Dow gaining full control of the venture for about $4.8 billion in cash.

The move effectively ends a joint venture that dates back 72 years, pending customary closing conditions and regulatory approvals. Dow said in a statement that the deal is expected to close by mid-2016 and that Dow Corning will continue to operate as a separate business.

Dow said that the two firms will maintain their equity stake in Hemlock Semiconductor Group, a polysilicon manufacturer comprised of several joint venture companies currently owned in majority by Dow Corning.

“Today marks a pivotal moment in Dow, Corning and Dow Corning's history as it represents the transition of a successful and thriving relationship in a joint venture that Dow and Corning built together from the ground up,” Andrew N. Liveris, Dow chairman and CEO, said during a joint teleconference regarding the transaction. “Corning has been a great partner to Dow and will always be a great partner to Dow.”

A Corning spokesman said Corning is exchanging its 50 percent interest in Dow Corning for 100 percent of the stock of a newly formed entity that will become a wholly owned subsidiary of Corning. This newly formed entity will hold about $4.8 billion in cash and its existing 40 percent stake in Hemlock Semiconductor Group.

Corning's spokesman added that Dow Corning will be allowed to continue to use the Corning name for at least several years.

With full control of the joint venture Dow said it will extend its participation in Consumer Solutions and Infrastructure Solutions segments by increasing its product offerings in several attractive end use applications—such as building and construction, consumer care and automotive.

Aida Jebens—principal analyst, silicones, for IHS Inc.—said in an email that by gaining full ownership of the joint venture, Dow Corning also can take full advantage of Dow's strong marketing network to expand its silicones business, utilizing the parent company to bring its silicone technologies to markets where it currently does not sell the product.

Dow said it is positioned to capture $400 million in run rate annual cost and growth synergies from the restructured ownership of Dow Corning. The transaction is expected to yield more than $1 billion in additional annual EBITDA at full run-rate synergies.

The firm said that synergies will be delivered anywhere between 24 to 36 months after the deal's closure.

“For Dow, owning 100 percent of Dow Corning's silicones business is the next step in our portfolio evolution as we drive higher, more stable, earnings, deliver strong cash flows and release value for our shareholders,” Liveris said.

“This transaction is the equivalent to multiple bolt-on acquisitions, but at a lower risk given our longstanding ownership of the joint venture. We are very familiar with Dow Corning's silicones technology platform, their end use applications and their customers. This transaction will open up new markets and geographies, create scale and relevance for our customers, and increase the breadth of product offerings across the Dow and Dow Corning businesses.”

For 2014, Dow Corning posted net income of $513 million on sales of $6.22 billion, according to information posted on its website. Through three quarters of 2015, sales dropped 8 percent to $4.18 billion, with the decline attributed mainly to a strong U.S. dollar. Net income fell 22 percent to $370 million. It employs 11,000 worldwide at 62 manufacturing sites and offices.

The firm said in its third quarter report that its silicones unit saw increased business in its “most differentiated and innovative product lines—which are also the most profitable—allowing us to offset some of the negative currency impact.”

Jebens said the transaction shouldn't impact the existing silicone industry much because Dow Corning already is well established in the silicones business.

“I think it will be business as usual for the silicones market,” she said in the email.

IHS projects the silicones market to grow at about 5 percent per year on a global basis with regional growth in the developed regions—such as the U.S., Western Europe and Japan—growing along gross domestic product rates, Jebens said. Demand in the developing countries should be in the 6-10 percent range with China at the high end.

Dow recently reached an agreement to merge with DuPont Co. and break the combined business up into three separate businesses with a focus on agriculture, commodities chemicals and specialty chemicals. DowDuPont is valued at about $130 billion.

“I think it is very positive,” Jebens said of Dow's outlook going forward from the two transactions.

“Dow Corning's silicones products will significantly strengthen the DowDuPont product portfolios in several major industries—like construction, automotive, electronics and personal care products.”

Corning CEO Wendell Weeks said Dow Corning's silicones business lies outside of the core technologies and manufacturing and engineering platforms at the core of its strategy and capital allocation framework.

Corning's spokesman said the firm's strategic and capital allocation framework consists of two primary actions—returning significant cash to shareholders and concentrating the company's research and development investments, capital spending, and strategic mergers and acquisitions on a cohesive set of three core technologies, four manufacturing platforms and five market access platforms.

Currently, Corning operates in five business segments—Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials and Life Sciences—with its equity from Dow Corning as a separate segment.

“By focusing 80 percent of our resources on opportunities that use at least two of the three categories, we believe that we can increase our probability of success, lower our cost of innovation and create higher, more sustainable, competitive advantages,” Weeks said on the conference call.

Corning's net sales decreased by 11 percent while its net income dropped by 79 percent in the third quarter of 2015. Sales decreased in all of its segments except Optical Communications, which increased by 7 percent.

It reported $53 million in equity earnings from Dow Corning, which was a 22 percent decrease compared to the third quarter of 2014. Through the first three quarters, Corning has reported $167 million in equity earnings from its stake in Dow Corning, which is a decrease of $9 million compared to the first three quarters of 2014.

Corning cited lower-than-expected sales of polysilicon for a 14 percent decrease of its Dow Corning equity in its first quarter financial statement for 2015. It said in its second quarter financial statement that its $63 million in equity for the second quarter met expectations.

“We are confident that we can deploy the $4.8 billion and utilize Hemlock assets to create significant value for our shareholders, including EPS accretion,” the spokesman said in an email. ”We will communicate how we plan to use the newly formed entity after closing.”

The new structure of Dow Corning's ownership will not affect the ownership structure of Hemlock Semiconductor. According to Hemlock's website, Dow Corning is the majority owner of the venture at about 80 percent, 40 percent of which will transfer to Corning with Dow retaining its half through Dow Corning. Shin-Etsu Handotai Co. Ltd. also owns a minority stake in Hemlock Semiconductor.

“Hemlock's products and manufacturing processes complement Corning's,” Weeks said. “It offers market access for the solar and semiconductor industries, which are relevant to several current and emerging growth programs at Corning. We see additional upside in Hemlock as the solar industry recovers.”

Hemlock Semiconductor is a leading provider of polycrystalline silicon and other silicon-based products used in the manufacturing of semiconductor devices, and solar cells and modules. The firm employs more than 1,000 at three locations—a manufacturing facility in Hemlock, Mich., a sales office in Tokyo, and a sales office in Seoul, South Korea.