Dow Chemical CEO Andrew Liveris looks to win in specialties and commodity JVs in spite of economic turmoil

Pair of aces

12 December 2008 13:10  [Source: ICB]

ONE DOWN - one to go. With the signing of the revised deal to create a $15bn (€11.8bn) integrated petrochemical powerhouse, US-based Dow Chemical is now turning its attention to closing its $18.8bn acquisition of US specialties firm Rohm and Haas.

As Kuwait's Petrochemical Industries Co. (PIC) revised the terms of the K-Dow deal lower in its favor, investors questioned whether Dow would look to do the same with its pending buyout of Rohm and Haas.

But Dow will not renegotiate the Rohm and Haas deal, and is moving forward to a closing by February 2009, said Dow chairman and CEO Andrew Liveris in an interview with ICIS.

"Unless we were given something from the regulators, there's no reason to renegotiate," said Liveris. "That creates a lose-lose situation. Right now, we're going to make the deal a win-win."

In July, Dow agreed to pay $78 per share for Rohm and Haas, a premium of 74% over its previous stock price of $44.83 per share.

Since then, the value of just about every chemical company, including Dow, has tumbled. Dow's stock price initially fell by $1.50, or 4.4% to $32.46 per share on the deal, but since then has fallen to about $20 per share.

"Adverse business conditions are not a reason to break up a deal, especially as this is a deal for the ages," said Liveris. "People can look at the negative side and say things changed a lot, but in a way, that's just too bad. Cycles come and go, but a 99-year-old company like this doesn't come up for sale too often."

While the price of Rohm and Haas on the public market today would assuredly be lower than its current $71 per share without the Dow deal, "they might not be selling [at those levels]," so it's a moot point, said Liveris. "Unless you're buying distressed assets, timing [doesn't play much of a factor]. Quality assets selling at a bargain price doesn't exist."

Dow has had more than 700 meetings with Rohm and Haas since July to discuss integration and growth strategies, said Liveris.

"This is like beachfront property in Malibu. Maybe a storm hit and took a few shingles off the roof, but this is a quality property and markets will recover," he said. "I'm never going to make anyone comfortable that the July price was not too high a price, because in today's reality, of course it is. But I'm homing in on the quality of the business and what we can do to fulfill the economics. I'm confident we can do that."

Dow initially targeted $800m in annual cost savings from the Rohm and Haas deal by 2010. Last Monday, Dow announced another $700m in savings on top of that in the same timeframe through a new restructuring plan.

The plan includes the elimination of around 5,000 jobs, or 11% of its workforce, the closure of 20 plants, the temporary idling of another 180 plants, and divestiture of nonstrategic businesses.

K-DOW "HAD TO HAPPEN" 

Meanwhile, the signing of K-Dow on revised terms has been finalized, with Dow set to receive $7.5bn in cash (versus $9bn originally) from Kuwait's PIC, plus a special $1.5bn distribution from K-Dow, funded by debt. PIC is owned by Kuwait Petroleum Corp. (KPC), the state-owned oil company.

The global financial crisis, as well as political disruptions in Kuwait have led to considerable uncertainty about the deal in recent months, noted Liveris.

"But I always believed, along with our partner, that this deal had to happen," he said. "The economics, given the degradation of the markets, meant the trough would come sooner and be deeper. So the natural thing to do was renegotiate the deal. It was a lot of hard work in the past 60 days to get to the finish line."

Still, the revised $7.5bn price represents a robust multiple of 8.3 times earnings before interest, tax, depreciation and amortization (EBITDA) on a trailing 12-month basis, and 7.1 times 2006 EBITDA, according to Liveris.

"In essence, the marriage between a petroleum-rich company like PIC and a technology franchise company like Dow Plastics, gives K-Dow the opportunity to pick up gas-oriented projects that Dow had in its stable, and oil-oriented projects that PIC and KPC were considering," said Liveris.

But given the lack of stranded gas around the world, the "growth vehicle" for K-Dow will be refinery-integrated petrochemicals, he noted.

K-Dow will explore potential liquids-based projects in China and Vietnam. On the gas-based side, K-Dow will explore opportunities in India, Libya and Egypt.

"This will be a project-rich company, able to access competitive feedstock and use leading-edge technology," said Liveris.

Despite the economic headwinds, Liveris expects K-Dow to announce at least two major projects in 2009 in refinery-integrated petrochemicals.

K-Dow will seek to leverage KPC's relationships with other state-owned oil companies such as Sinopec in China, and PetroVietnam.

"Those relationships can be parlayed into K-Dow when it goes beyond refinery and into petrochemicals," said Liveris. "That mimics what an integrated oil and petrochemical producer can do, but in this particular case, it's a country - so Kuwait can provide us with the oil feedstocks. K-Dow, because of its two parents, will be the joint venture [JV] partner of choice."

Around 85% of the world's petroleum resources are owned by national oil companies (NOCs), Liveris pointed out. "And these NOCs, like Gazprom of Russia or Sinopec of China, will be partnering with companies that can bring them technology and access to different markets. K-Dow will be well-suited to that."

K-Dow will be integrated through the ethylene chain to ethylene amines, ethanolamines and polyethylene (PE). The company will also produce polypropylene (PP), polycarbonate (PC) and polyethylene terephthalate (PET), and license PP technology and catalysts.

DIVIDEND "VERY SAFE"

As to Dow's hard hit stock price and resulting high dividend yield of nearly 9%, Liveris insists the quarterly dividend is "very safe."

A high dividend yield suggests investors are skeptical it can be maintained. When the dividend yield is high, it means the stock price has fallen, and that investors do not think a company can maintain the current dividend.

Dow's quarterly dividend is 42 cents, making for an annual payout of $1.68. At $19, the stock had a dividend yield of 8.9%.

"What a fantastic deal for anyone who wants to buy Dow stock with an over 9% dividend yield. The decoupling of the equity markets from reality is ludicrous," said Liveris. "The worst signal in the world is to cut the dividend to get the yield down to a more market-reasonable yield."

And while an ebbing tide will bring down all boats, "I think we're higher up in the water because we have a better balance sheet, good cash flows, cash from the PIC venture and incredibly important synergies coming from the Rohm and Haas deal," he added.

Dow Chemical will have a debt/capital ratio in the low 40% range following the Rohm and Haas and PIC deals, said Liveris.

"There's no reason for us to cut the dividend. I am not going to be the first CEO at Dow Chemical to do that. I understand why people ask that, but the answer is an emphatic 'no,'" he added.

Liveris envisions Dow as a world premier specialty chemical player, and that vision is within grasp.

"If we were Rumpelstiltskin and woke up in December 2009, we'd see a Dow Chemical that is very downstream-oriented, and with a third of its portfolio in cost-advantaged JVs."

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By: Joseph Chang
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