The Brazilian based company, Braskem, has announced their intended acquisition of Dow’s Polypropylene business. This is a deal that is extremely convenient for both companies according to their future strategies. Based on the recently published 2011 Townsend Polypropylene Report, we forecast the North American and Western European markets to grow at only 2.5% and 2.1%, respectively, per year in the next 5 years, well below the forecasted global PP growth rate of 5.0%/year.  However, this acquisition isn’t justified from a market perspective alone.

It’s been some time since Dow signaled that their PP business was not in its future strategy. Low margins, especially in the US, a commodity based product line (non-technology-differentiated) and a necessity of new investments to keep the business growing were some of the reasons for this divestment. As stated by Andrew N. Liveris, Dow's Chairman and Chief Executive Officer recently: “This business has delivered historic margins that do not meet our expectations moving forward and is no longer core to Dow’s strategy. We are shifting our Plastics portfolio from a commodity focus to that of a performance focus. This divestment is directly in line with that strategy, and allows us to continue to focus on our three main priorities: retiring debt, remunerating shareholders and investing in our innovation agenda so that we deliver consistent earnings growth.”

Since 2002, Braskem has had aggressive expansion through acquisitions and strategic alliances, in order to position itself as one of the largest global petrochemical companies. With this acquisition, Braskem becomes the #2 polypropylene producer in North America and gains a foothold in Western Europe, a region that was being served only by a Braskem sales office. Also with this acquisition, the company acquired an amazing platform of innovative PP products such as the INSPIRE™ Performance Polymers. It’s important to mention that the catalyst and technology businesses are not part of this deal and are being kept by Dow.  Braskem continued to generate good margins with its operations globally, generating EBITDA in 1Q2011 US$ 570 MM.  At this acquisition price (US$ 340 MM, 6.7x PP Dow EBITDA) neither its cash flow nor its “Investment Grade” will be affected.  When this purchase is final, Braskem will have a global position in the polypropylene market and will continue to strengthen its position in polyethylene with their new investment in Mexico with Idesa.

Could this be the first sign of a growing trend?  As we see more announcements of investments in the US and Canada due to increased availability of shale gas, Townsend believes this will create new mergers and acquisitions opportunities around the world as companies look to better position themselves in the global polyolefins marketplace.

For more information on the polypropylene industry or to obtain a copy of our newly released 2011 North American and Western European Polypropylene Market Study reports please contact Roberto Ribeiro at +1-281-873-8733 Extension 155 or email rribeiro@townsendsolutions.com .