FocusDow/Rohm & Haas deal positive, expensive

10 July 2008 18:36  [Source: ICIS news]

Wall Street sees deal as positive, costlyBy Joseph Chang

NEW YORK (ICIS news)--Dow Chemical’s $18.8bn (€12.0bn) acquisition of Rohm and Haas will be positive in the long term, but the price is expensive, Wall Street analysts said on Thursday.

“We consider the combination to be a good fit that is consistent with Dow’s long-term vision of transformation into an integrated specialty chemicals concern,” said Bank of America analyst Kevin McCarthy.

“Although we expect to see modest dilution in the near term, we can readily see that in the long term after various synergies are realised, this transaction will likely be positive,” said BB&T Capital markets analyst Frank Mitsch.

“Dow has a 100-year plus history and does not make strategic moves for the next quarter, but rather thinks long-term, and in the words of its CEO, ‘deal premiums are forgotten after awhile,’” he added.

Dow is paying $78/share for Philadelphia, Pennsylvania, US-based Rohm and Haas, representing a 74% premium to the target stock’s previous close of $44.83.

Shares of Dow fell $1.50, or $4.4%, to $32.46 in early Thursday afternoon trading while shares of Rohm and Haas jumped $29.17, or 65%, to $74.

Dow estimated it is paying 11.5x FV/EBITDA (firm value/earnings before interest, tax, depreciation and amortisation) on a 12-month trailing basis for Rohm and Haas. With expected cost synergies, Dow said it is paying 7.7x EBITDA.

Many analysts said Dow is paying a high price for Rohm and Haas.

“The valuation appears rich,” said McCarthy. He noted that the deal represents multiples of 1.8x estimated 2008 sales and 11.4x EBITDA versus an average trading multiple of 8.2x EBITDA for specialty chemical companies.

“We believe Dow is paying a very high price,” said Oppenheimer analyst Edward Yang. “The very favourable terms suggest they wanted Rohm and Haas very badly.”

While Dow is paying a steep premium for Rohm and Haas, “management laid out a very compelling story,” said Buckingham Research analyst John Roberts.

“The post synergy deal value of 7.7x EBITDA is below BASF’s acquisition of Engelhard, PPG’s acquisition of SigmaKalon and AkzoNobel’s acquisition of ICI,” he noted.
Dow defended the deal, saying the previous stock price of Rohm and Haas did not reflect its true value.

“A one-day premium is a fascinating topic, which I hope in a week or two will be irrelevant,” said Dow chairman and CEO Andrew Liveris on a conference call with the financial community. “But Rohm and Haas’ stock price did not reflect its value. This is a jewel. The fact that it became available matched our strategy beautifully.”

Dow projects that the acquisition of Rohm and Haas will boost its trough annual earnings per share (EPS) from $3.50, to $4. Dow expects the trough to occur in 2010 or 2011.

“This is a huge [earnings] jump in a downcycle,” said Liveris. “And we are excited about the earnings potential at the next peak - we expect earnings well north of $10/share.”

At the last trough in 2002, Dow earned just $0.34/share. At the 2005 peak, its posted EPS of $4.37.

In terms of earnings dilution/accretion, Dow expects the deal to be breakeven in 2009, accretive by around 5% in 2009 and accretive by 13% in 2010, said chief financial officer Geoffery Merszei.

The Dow/Rohm and Haas deal could be positive for other specialty chemical companies, said Jefferies & Co. analyst Laurence Alexander.

“The deal helps put a floor for chemical valuations and should be particularly positive for sentiment on Huntsman, Cytec Industries, Hercules and Omnova Solutions,” he said.

($1 = €0.64)

To discuss issues facing the chemical industry go to ICIS connect
For more analysis and insight on the Dow Chemical/Rohm and Haas deal, look for the 21 July  issue of ICIS Chemical Business magazine

By: Joseph Chang
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