- The Washington Times - Tuesday, December 30, 2008


The collapse of a joint venture with a state-owned Kuwaiti company may make Dow Chemical Co. less willing to pay the $15.3 billion price tag for Rohm & Haas that it initially agreed to last summer as energy prices peaked.

Kuwait’s government backed out of the deal with Dow late Sunday, calling the K-Dow Petrochemicals joint venture, “very risky” because of the global financial crisis and crude prices that have tumbled more than 70 percent since July.

Midland, Mich.-based Dow had expected more than $7 billion in pretax proceeds from the K-Dow deal.

Dow would not comment Monday on the failure of the joint venture or negotiations with Rohm & Haas.

Shares of both U.S. companies tumbled more than 16 percent Monday after the collapse of the $17.4 billion venture with Kuwait’s Petrochemical Industries Co.

Dow agreed to pay a 74 percent premium for Philadelphia-based Rohm & Haas in July as it, and other chemical makers, faced unprecedented costs for energy and carbon-based feedstocks.

Rohm & Haas said it “continues to work diligently” to complete the acquisition, which it said was not affected by the K-Dow venture.

Some analysts thought it would be unrealistic to expect the original price to hold and wondered whether Dow would take on more debt.

Dow Chemical Co. said this month that it will cut 5,000 jobs, or about 11 percent of its work force. It also moved to close 20 plants and idle 180 others.

Dow initially agreed to pay $78 per share, a huge premium over Rohm & Haas’ $44.83 closing price on July 9.

Dow said at the time that buying Rohm & Haas would allow it to cut costs and provide a cushion from the volatile chemicals market.

But Dow’s balance sheet could be leveraged by $29.6 billion, analysts said, if the Rohm & Haas deal is not reworked.

That might jeopardize Dow’s investment-grade rating, said John Rogers, an analyst with Moody’s Investors Service.

“Dow clearly doesn’t want to back itself into a corner,” Mr. Rogers said.

If Dow takes on that much debt, it could threaten the dividend, said Banc of America Securities analyst Kevin McCarthy in a note to investors.

Dow has issued a quarterly dividend for nearly a century.

It’s more likely that the deal will be renegotiated for under $70 per share, Deutsche Bank analyst David Begleiter said in a note to investors.

“There appears to be no way for Dow to unilaterally walk away from and/or terminate the merger agreement with Rohm & Haas,” Mr. Begleiter said.

There are ample reasons to try to push the deal forward, however. Dow could eliminate a longtime rival in the competitive chemical sector.

A Rohm & Haas buyout would also let Dow better compete with Germany’s BASF SE, the world’s largest chemical company.

Barclays Capital analyst Sergey Vasnetsov said the K-Dow collapse should not affect the Rohm & Haas buyout in part because of outside financing from Warren Buffett’s Berkshire Hathaway and the Kuwaiti government.

Berkshire Hathaway committed $3 billion in preferred securities, an investment that would make it the largest Dow shareholder if the deal closes.

Berkshire Hathaway would not comment on the deal.

The Kuwaiti Investment Authority - a wealth fund run by the Middle Eastern country’s government - committed $1 billion in convertible preferred securities. It was not immediately clear whether Kuwait intended to stand by that agreement, as political pressure in that country helped sink the K-Dow venture.

The Haas family, descendants of one of the specialty chemical maker’s founders, holds about 65 million shares of Rohm & Haas, a 33 percent stake worth nearly $5.1 billion based on the purchase price.

Dow shares tumbled 19 percent, or $3.60, to $15.32. Shares of Rohm & Haas fell 16 percent, or $10.22, to $53.34.

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