Dow, Reliance JV this week

Dow Chemicals, the US-based petrochem giant, may announce its intent of floating a joint venture with Reliance Industries this week.

Sources close to the development said the foreign company would announce this week, if not Sunday, that it would spin off its underperforming commodity businesses into a separate entity in which Reliance would pick up a majority stake. However, the valuation of the joint venture might be not immediately announced, they said.

It means the announcement may not give a sense of Reliance's investment for picking up a majority stake in the venture. Dow, perhaps, would announce the appointment of a valuer to ascertain the worth of the venture, they added.

Both the companies are keeping mum on the issue. A Reliance spokesperson declined to comment while an e-mail sent to Dow remained unanswered.

Bankers said Reliance would pick up 60 per cent stake for $15 billion (Rs 66,000 crore) for the acquisition of 60 per cent stake in Dow Chemicals' underperforming commodity businesses.

They said the long-term plan would include transferring Dow's manufacturing units from high-cost locations in the US and Europe to India, specifically Reliance's industrial zone at Jamnagar.

The deal, once materialised, will be the largest investment by any Indian company to purchase foreign assets, surpassing Tata Steel's recent acquisition of the Anglo-Dutch steel major Corus Group for $13 billion.

This underlines Reliance's desire to get into global markets while Dow would be able to bolster profits by reducing the size of its commodity chemicals business and reducing cost.

Citigroup, in a research report, says any acquirer may require to pay 15 per cent premium for acquisition of the majority stake in Dow's commodities business over its normalised valuation of $21.5 billion. Going by this calculation, Dow's underperforming commodities business should be valued at $24.8 billion. A 60 per cent ownership in joint venture by Reliance would result in a pre-tax valuation of roughly $15 billion.

Bankers said a deal to this effect would be a precursor for Dow to pull out of the joint venture in the future. "Dow will not continue to be a financial investor in a Reliance company. It may take some years but it will definitely sell the entire stake to Reliance in the future," they said.

The research report also says Dow would use the cash for three objectives: return cash to shareholders through massive stock buyback, acquire speciality chemicals assets and some debt payment.

Citigroup believes that although the deal is complex, if executed, it would be seen as positive for Dow because investors have been waiting for Dow to take some action on its "asset light" strategy, which Dow has been expounding for about a year now.