Dow may need to sell Indy’s Dow AgroSciences

Financially strapped Dow Chemical Co. acknowledges it may sell Indianapolis-based Dow AgroSciences LLC, the ag-chemicals-and-biotech
fi rm that’s one of the biggest jewels in the city’s life sciences crown.

Dow Chemical CEO Andrew Liveris said on a Feb. 3 conference call with analysts that the Midland,
Mich.-based company has teams working with investment banks to evaluate potential buyers for 12 major
assets, including Dow AgroSciences.

Liveris, 54, made clear Dow Chemical would be a reluctant seller, but needs to raise cash.

"We are very proud of the [AgroSciences] business. It’s a high earner. In the last five years,
we’ve invested in it. It generated a great R&D pipeline … a lot of great niches and, in fact, good
positions around the world in various crops and in various chemical markets," he said.

"But having said that, I would tell you
that all options are on the table."

The Indianapolis company launched in 1989 as Dow-Elanco, a joint venture between Dow and locally based Eli Lilly and Co. The
company adopted its current moniker in 1997, when Dow bought out Lilly’s 40-percent share for $900 million.

The company long has produced commodities like
pesticides and herbicides, and is still best known for its bread-and-butter agricultural chemicals business.
But under CEO Jerome Peribere, 54, who took charge in 2004, Dow AgroSciences increasingly has concentrated
on biotechnology, using genetics to create plant vaccines and new strains of seeds.

The shift has revved up the financial results of the company, which employs 5,400, including 1,100
locally at its Zionsville Road headquarters near West 96th Street.

Dow AgroSciences in the fourth quarter reported record revenue of $885 million, despite a decline
in ag chemical sales caused by product shortages and lack of available credit for farmers in some regions.

For the year, Dow AgroSciences’ revenue rose
20 percent, to $4.5 billion, and operating profit rose 36 percent, to $761 million. Helping ratchet up
revenue was the company’s acquisition of nine hybrid seed research companies and related high-tech production
facilities over the past two years.

Peribere said at a Feb. 10 bio-ag conference in New York that Dow AgroSciences has been able to push up profit by increasing
revenue and holding expenses virtually in check.

"Simply put, our strategy is paying off," Peribere said.

Cash crunch

The business accounts for less than 8 percent of Dow Chemical’s sales, but is one of its few bright
spots.

The Michigan company
reported a $1.6 billion loss for 2008’s fourth quarter due to recession-driven decline in demand for
its plastics and chemicals.

Dow Chemical also is struggling with a pair of fizzling mega-deals that are now entangled in litigation. Late last year, a
planned joint venture with Kuwait’s state-run Petrochemical Industries Co. collapsed.

Kuwait was to have funneled $9 billion into Dow Chemical’s coffers, allowing it to complete the
$15.3 billion acquisition of Philadelphia-based Rohm and Haas Co.

Dow Chemical has sued Kuwait to close the first deal, and Rohm and Haas has sued Dow to try to
force it to complete the second. While courts consider the fate of each transaction, Dow Chemical is
considering a spectrum of unattractive options to raise cash, including slashing its dividend, closing
plants, borrowing that might lead to downgrades of its debt rating to junk status, or selling new stock
at a depressed price.

TheDeal.com reported this month that Dow Chemical likely could raise $10 billion by selling Dow AgroSciences along with its
50-percent stake in Dow Corning Corp., a maker of silicone-based products.

The mergers-and-acquisitions publication listed potential buyers of Dow AgroSciences as DuPont
Agriculture and Nutrition, Syngenta AG and Bayer Crop-Science AG.

JP Morgan analyst Jeffrey Zekauskas said in a report that AgroSciences is the sixth-largest player
in agricultural chemicals, a $48 billion worldwide market ripe for mergers.

"The top six global participants command approximately
two-thirds of the world market. Industry consolidation has been a meaningful trend for the previous decade,
and we expect additional rationalization over the next several years," Zekauskas said in his report.

"The maturity of the market, high distribution
and logistical costs, and the substantial expenses involved in research for new biotechnological traits
are key factors leading to consolidation."

Bright outlook

Still, analysts say Dow likely won’t sell the business unless it feels it has no choice.

"These days, it’s basically a profi t center,"
said William Selesky, an analyst with Argus Research Group.

"In light of what they forecast going forward, the difficult challenging economic environment,
I’d think they’d want to hold on and grow those segments that are performing well."

He said the long-term expansion prospects are
strong, in part because of world population growth.

It’s not clear how a sale of Dow Agro-Sciences might affect local employment, though Indianapolis
life sciences and economic development leaders are hoping they don’t have to find out.

Dow AgroSciences, Lilly and Roche Diagnostics
Corp. are among the major assets that BioCrossroads, the region’s life sciences initiative, is trying
to build on.

The company
is one of the founding members of BioCrossroads, and its executives have provided an enormous amount of research
and support, said David Johnson, CEO of the initiative.

The company led development of Bio-Crossroads’ plan for growing Indiana’s bio-ag industry—one
of eight key life sciences sectors the initiative has pinned its hopes on.

Johnson said there are plenty of compelling reasons
for a buyer to keep a major presence here, such as concentration of biotech expertise and the company’s
continuing relationships with Lilly and Indiana’s research universities.

"Without them, we’d probably be missing an entire component of an integrated life sciences
strategy," Johnson said. "I would expect that going forward, whether part of the larger Dow
organization or an independent company, it’s only going to grow here on this landscape."

The last time Dow sold an Indianapolis-based
business, the impact was stinging.

In 1998, S.C. Johnson & Son Inc. of Racine, Wis., purchased locally based DowBrands, maker of Ziploc bags and other consumer
products, for $1.1 billion. DowBrands had annual revenue of $800 million and employed 1,000, including 300 in Indianapolis.
Soon after the deal closed, Johnson shut down the Indianapolis headquarters.

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