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Fitch: Shareholder Activists Shake Chemical Money Tree

February 10, 2014

Share buybacks are en vogue across the chemical industry as E.I. DuPont de Nemours and Co. (A/Stable) and The Dow Chemical Company (BBB/Stable) are the latest to announce large share repurchase programs.

Fitch Ratings believes these buybacks are in part due to shareholder activism. Daniel Loebz's Third Point has taken a position in Dow while Nelson Peltz maintains a position in DuPont. It remains to be seen whether the activists will be satisfied with the announced buyback programs or will push for further shareholder- friendly actions.

The announced programs of both companies rely on existing cash balances and Fitch believes gross debt and gross leverage will be unaffected by the size of the programs announced by both companies. This contrasts with CF Industries Holdings, Inc.'s (CF) (BBB/ Negative) announcement in December that it will accelerate its share repurchase program and will issue debt to do so. This resulted in Fitch revising CF's Rating Outlook to Negative. Third Point had announced a stake in CF in July 2013.

Dow plans to repurchase $4.2 billion of shares in 2014. Dow had $5.9 billion in cash at Dec. 31, 2013. The gross share repurchase amount will be partially offset by share issuance as part of employee compensation. Fitch expects Dow to generate FCF in 2014 which will replace some cash used for share repurchases. Dow also plans for large divestitures and while the timing of these is uncertain, Fitch expects Dow to be successful in finding buyers. Those sales will also add to cash balances.

DuPont announced a new $5 billion share repurchase program open ended program but plans to repurchase $2 billion of shares in 2014. DuPont had $8.9 billion in cash at Dec. 31, 2013. Partially offsetting the cash usage, in addition to share issuance for employee compensation, Fitch expects DuPont to generate over $1 billion in FCF in 2014. DuPont also plans to close the sale of Glass Laminating Solutions/Vinyls business to Kuaray. Kuaray agreed to purchase the business for $543 million plus the value of inventories. Fitch expects gross debt balances will decline in 2014 as DuPont also committed to repaying $1.7 billion in 2014 maturities with cash balances.

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