Kuwait pulls the plug on joint venture with Dow Chemical
Market watchers debate the impact on Dow’s buy of Rohm & Haas
By Dave Hannon -- Purchasing, 12/29/2008 10:09:00 AM
The Kuwaiti government this week informed Dow Chemical that it is cancelling plans to form a petrochemical joint venture with Dow, which was to be called K-Dow. Kuwaiti’s Supreme Petroleum Council said that investing $7.5 billion in the deal was not economically feasible given the current price of oil and demand trends for petrochemicals. The joint venture was due to take effect on Jan. 1.
Dow had announced the latest version of the joint venture in early December as part of a broader reorganization strategy to adjust to slumping demand and limit its exposure to energy costs. In a statement, Dow officials said “While disappointed in this outcome, Dow remains committed to its Middle East strategy” which includes shifting more of its production to the region where energy costs are lower. In announcing the K-Dow deal earlier this month, Dow's CEO Andrew Liveris said, "The formation of K-Dow Petrochemicals is a critical milestone in our transformational strategy. This is a giant step forward in strengthening our Basics businesses through joint ventures, reducing our cyclicality, our capital intensity, and freeing up $9 billion in pre-tax cash to invest in our Performance businesses to deliver on our strategy of becoming an earnings growth company."
That deal’s cancellation, say market watchers, could impact Dow’s planned $13 billion acquisition of Rohm & Haas. Despite Rohm & Haas issuing a statement saying it “continues to work diligently towards completing the proposed transaction with Dow in early 2009” some analysts feel the loss of cash from the cancelled joint venture combined with lower chemical sales, tighter credit markets and Dow’s slumping stock price will make the Rohm & Haas deal, as currently structured, very difficult. Dow announced earlier this month it was closing 20 plants and idling 180 more.
“This throws into question whether the Rohm & Haas acquisition will go through,” said London-based Christopher Middleton, CEO of Atlantic Equities in a Bloomberg interview. “It’s less likely, because they still need to find the money.”
CNBC commentator David Faber says while there appears to be very little “wiggle room” for Dow to back out of the Rohm & Haas deal, “given the last 12 months, how many deals have we seen the acquirer step away from deals in ways we might not have thought about.”
The Wall Street Journal reports that Edward Yang, analyst at Oppenheimer, says: “At this point, we would lean toward Dow renegotiating the [Rohm & Haas] price vs. walking away completely. Dow should recover more than $2 billion from the Kuwaitis, and although the Rohm & Haas cancellation fee is rather small at $750 million, Dow’s CEO has been rather vehement in his desire to consummate the deal.”
In a recent note, Barclays Capital analysts said the cancellation by Kuwait leaves Dow "with full downside exposure to the commodity chemicals trough." And Citi Investment Research analyst P.J. Juvekar said in a recent note, “Dow Chemical should be looking to protect its shareholders by cutting the Rohm & Haas deal at a lower price or walking away from the deal by paying a breakup fee.”
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