Dow Chemical Co. will separate a portion of its century-old chlorine business and sell it to Olin Corp in a tax-efficient deal worth $5 billion as part of efforts to shed low-margin assets.
The deal will make smaller rival Olin the world's largest producer of chlor-alkali, which is used to make chlorine and caustic soda. These chemicals are used in a variety of industries such as healthcare, textiles and automotive.
Olin's shares jumped as much as 25 percent to $33.91, a near 17-year high, valuing the company at about $2.60 billion.
Dow, which had been pressured by activist investor Dan Loeb to break itself up, first announced plans to sell a bulk of its chlorine operations in 2013.
The company averted a proxy fight with Loeb last November by agreeing to add four independent directors to its board.
Dow has turned its focus to more profitable businesses such as packaging, electronics and agriculture.
Chief Executive Andrew Liveris said there could be more deals over the next 12 months as the company simplifies its joint ventures.
"JV conversations are ongoing right now and we are seeking the right strategic answers," he said.
As part of the Olin deal, Dow will sell its U.S. Gulf Coast chlor-alkali and vinyl, global chlorinated organics and epoxy assets.
Dow will get $2 billion in cash and cash equivalents and about $2.2 billion in Olin shares in a Reverse Morris Trust deal, a transaction that allows a parent company to sell its unit in a tax-efficient manner.
Olin will assume $800 million of pension and liabilities under the deal.
The transaction will give Dow shareholders control of the combined company.
The deal, likely to close by 2015 end, will create a company with revenue of about $7 billion and EBITDA of $1 billion.
The combined business will be better positioned as the chlor-alkali market in North America improves, Olin Chief Executive Joseph Rupp said on a conference call.
While low raw material costs due to cheap shale gas have been an advantage, excess capacity and subdued demand have been a drag on the chlor-alkali market.
Olin will now control 30 percent of the North American chlor-alkali market but regulatory barriers to the deal are unlikely, said Key Private Bank analyst Stephen Hoedt.