Dow-Olin deal fails to clarify strategy: Analyst

Need more details on Dow Chemical deal: Analyst
Need more details on Dow Chemical deal: Analyst   

Dow Chemical's chlorine business sale announced on Friday is consistent with its latest strategy, but the new course doesn't makes sense for investors, the managing director at equity brokerage CLSA said.

Dow Chemical said it would separate a large part of its chlorine business and merge it with Olin Corp. in a deal that will give Dow control of Olin.

The transaction, valued at $5 billion, will result in Dow shareholders owning about 50.5 percent of Olin shares, with existing Olin shareholders holding the rest.

CLSA's Mark Connelly pointed out that Dow is getting out of chlor-alkali business because it is not consistent with its growth strategy—which focuses on reducing exposure to commodities—but it is spending "huge amounts" to expand into ethylene. Chlor-alkali is the process used to make chlorine. Ethylene is used to make a wide array of industrial products, including polyester textiles, consumer packaging and beverage bottles.

"Chlor-alkali is the ethylene of 10 to 15 years ago, so in essence you're just replacing one commodity with another commodity, and talking about value add, but it's hard to talk about value add when you're spending billions of dollars to build commodity capacity," he said on CNBC's "Squawk Box."

"It's a very mixed message. That's the challenge investors are facing."

Shares of Dow were up 5 percent in early trading following the announcement.Olin's share price opened higher by 25 percent. (Click Dow and Olin for the latest prices.)

Connelly said the deal appears to be well-structured, but Dow needs to address the economics, particularly how much the individual assets that fall into the transaction are earning.

"Dow has been very circumspect about what assets specifically were being included and what those assets earn, so we need to know what's left behind and what's going before we can have a firm sense of whether this is a good price or not," he said.

The deal is likely a response to activist pressure on the chemical business, Connelly added, noting that materials companies in general have done a poor job of convincing shareholders that they are working in their best interest.

"Dow in particular has changed it's strategy so often lately that we struggle to figure out just exactly what they're trying to accomplish," he said.

Reuters contributed to this report.