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Dow, Rohm & Haas deal thrown into doubt

The collapse of a  joint venture between Dow Chemical and a state-owned Kuwaiti company raised questions about Dow's continued willingness to pay $15.3 billion for Rohm & Haas Co.
/ Source: The Associated Press

The collapse of a joint venture with a state-owned Kuwaiti company may make Dow Chemical less willing to pay the $15.3 billion pricetag for Rohm & Haas 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" due to 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 following 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, were faced with 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 believe it would be unrealistic to expect the original price to hold, however, and wondered whether Dow would take on more debt.

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

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," 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 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," 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 due in part to 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 if Kuwait intended to stand by that agreement, as political pressure in that country helped sink the K-Dow venture.

Debt financing had been committed by Citigroup, Merrill Lynch and Morgan Stanley. Spokeswoman for Citi and Merrill Lynch declined to comment, and a Morgan Stanley representative was not immediately available.

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.

Based on the per-share purchase price and the roughly 196 million shares Rohm and Haas had outstanding as of April 22, the deal is worth about $15.29 billion. The companies have said assumed debt will boost the total value of the transaction to about $18.8 billion.

Dow has said it plans to establish an advanced materials business unit at Rohm and Haas' current headquarters in Philadelphia and to contribute some Dow businesses to Rohm and Haas' existing portfolio. The total revenue of that new unit is expected to approach $13 billion.