The Right Chemistry, Driven By Leverage

The two chemical names in my portfolio are both doing well on an otherwise tough day, supporting my broad market portfolio. Lyondell Chemical [LYO] sells its Titanium Dioxide business to the Saudi-owned National Titanium Dioxide Co. This will allow them to focus on petrochemicals and refining, and (what!) reduce debt. Looks like a good multiple on the sale and a good deal strategically.

Dow Chemical [DOW] is a buyout target?! I would have thought that it was too large. Strange times indeed, where any asset with a low EV/EBITDA not only can be bought and refinanced, but are almost required to be so. And, with less leverage and a simpler structure, might not Lyondell be a target also? It’s much smaller.

In the short run, all of this is bullish for the market. Remember, bubbles are financing phenomena. Bubbles pop when cash flow is insufficient to continue financing them. We’re not there yet, but watch for signs of difficulty in these newly levered creations. Private equity is doing these deals at lower and lower IRRs from what I’ve heard, and eventually, that is not sustainable, given the levered up risks taken.

Long DOW LYO