Dow Chemical to buy Rohm & Haas

Deal vaults Dow headlong into specialty chemicals market

By Staff -- Purchasing, 7/10/2008 7:51:00 AM

Coatings and electronic-materials company Rohm & Haas has agreed to be bought by Dow Chemical for $78/share in a deal valued at $15.3 billion that will push Dow further into specialty chemicals market and away from the commodity chemicals market.

The deal, which is expected to close in early 2009, will allow Rohm & Haas, a coatings and electronic-materials maker, to continue operating under its own name from its Philadelphia headquarters and incorporate some of Dow's specialty chemicals units. The buyout will broaden Dow’s product offerings in the paints, coatings and electronic materials.

The move is the latest by Dow CEO Andrew Liveris to move the Midland, Mich., company away from basic chemicals toward the higher margin and less volatile specialty chemicals and downstream markets. As far back as early 2007, Liveris said Dow is “steering away from the inevitable downslope of a commodity chemical company. It's very important that we...prove that we are not just a commodity cyclical company.”

“The addition of Rohm & Haas' portfolio is game-changing for Dow," Liveris said in a statement on the deal. “Dow…values [Rohm & Haas’] strong market-facing culture and solid reputation that have made it one of the most successful companies in the specialty sector and such a desirable entity.”

Dow said in its statement the deal will have pretax cost synergies of at least $800 million per year, with roughly 35% of that savings coming from increased purchasing power for raw materials. Another 20% would come from supply chain and manufacturing improvements, Dow said in its presentation on the deal. Both Dow and Rohm & Haas have cut back capacity and pushed major price increases and surcharges recently in an effort to offset their massive raw materials price increases.

In a CNBC interview, Liveris said the deal came about rather suddenly, but Dow was ready to act “very fast” when the opportunity presented itself. CNBC asked Dow specifically about Rohm & Haas a month ago and at the time, Liveris did not indicate there was a deal in play.

When asked why Dow was willing to pay the $78/share premium price, Liveris said “one day premiums are interesting metrics and tend to get forgotten very quickly…This property is THE property in the space…Frankly it was worth the price.” Describing Rohm & Haas as the “beachfront property” in the chemicals industry, Liveris said Dow would invest in Rohm & Haas, and let it remain in Philadelphia and run “semi-autonomously.”

“This deal uses up much of Dow's firepower,” said Martin Evans, an analyst at Cazenove in London in a report. “The premium is high—as is often the case when chemical assets are acquired—and is a necessary part of their transformation away from commodity exposures.”

To finance the deal Dow will use $3 billion worth of funding from Berkshire Hathaway and another $1 billion from a Kuwaiti investment house. Liveris told CNBC he first met with Warren Buffet in May to discuss possible funding of deals and Buffet “bought into our story. We didn’t have this deal at the time, but from that conversation came many others and he told us to call him when we’re ready with a deal.”

The $1 billion in funding from the Kuwait Investment Authority creates yet another tie between the U.S. petrochemicals industry and the Middle East and between Dow and Kuwait specifically. In December, Dow sold $9.5 billion worth of its businesses to create a joint venture with the state-owned Kuwaiti Petrochemical Industries Co. “We’ve been in and around Kuwait for more than a decade and we’re proven performers to the Kuwaitis,” Liveris told CNBC. Bloomberg reported last week that Dow and Saudi Aramco plan to build a $26 billion petrochemicals complex in Saudi Arabia to take advantage of the world's biggest oil reserves and meet rising demand for plastics used in consumer goods, said a banker with knowledge of the deal.

Last year, General Electric sold its plastics business to SABIC for $11.6 billion.

To view Andrew Liveris’ presentation on the deal, CLICK HERE.