UpdateK-Dow blow-up jeopardises Rohm and Haas deal - BoA

29 December 2008 17:26  [Source: ICIS news]

A Dow chemical plant in Midland MichiganNEW YORK (ICIS news)--The cancellation of the K-Dow deal could put Dow Chemical’s planned $18.8bn (€13.3bn) acquisition of Rohm and Haas in jeopardy, Bank of America (BoA) said on Monday.

“Cancellation of K-Dow could compromise Dow’s ability to close its pending acquisition of Rohm and Haas, a key element of Dow’s strategic plan, although neither that deal nor related financing is contingent upon closing of K-Dow,” said Bank of America analyst Kevin McCarthy in a research note.

On 1 December, US-based Dow Chemical finalised its K-Dow commodity chemical joint venture agreement with Kuwait’s Petrochemical Industries Co, which provided for $9bn in cash payments to Dow, including a planned $1.5bn distribution from K-Dow.

Dow could file an arbitration claim for up to $2.5bn for the break-up of the deal in London under rules of the International Chamber of Commerce, said the analyst.

On 2 December, Dow chairman and CEO Andrew Liveris said the company would not renegotiate the terms of its deal with Rohm and Haas. In July, Dow agreed to pay $78/share for Rohm and Haas, a premium of 74% over its previous price of $44.83.

Without the cash from the K-Dow deal, Dow would be highly leveraged if it were to complete its acquisition of Rohm and Haas, noted McCarthy.

If Dow completed the Rohm and Haas deal on its original terms, the company would have net debt of up to $29.6bn, representing a leverage ratio of 4.5x estimated 2009 earnings before interest, tax, depreciation and amortization (EBITDA), McCarthy projected.

Shares of Rohm and Haas plunged $13.37, or 37%, to $50.19 in Monday morning trading, while Dow’s stock fell $3.92, or 21%, to a new 52-week low of $15.

The merger arbitrage spread on Rohm and Haas has widened to $27.81, or 55.4%, indicating growing scepticism among investors that the deal will go through on the original terms, if at all.

"Dow should be looking to protect its shareholders by cutting the Rohm and Haas deal at a lower price or walking away from the deal by paying a break up fee," said PJ Juvekar of Citi Investment Research.

"If Dow is forced to pay the original price of $78/share, then we will have to re-evaluate our thesis on Dow," Juvekar said in a research note.

The collapse of the deal “shows that North American ethylene assets are less attractive to Middle East buyers," said Juvekar.

If the deal were called off, Rohm and Haas’ stock would likely decline much further. Just about every chemical stock has fallen significantly since Dow announced the Rohm and Haas acquisition in July, when the latter company was trading at $44.83/share.

Dow previously indicated it has a committed $13bn bridge loan to complete the Rohm and Haas deal, noted Buckingham Research analyst John Roberts in a research note.

Additional funding is committed from investment group Berkshire Hathaway ($3bn) and the Kuwait Investment Authority ($1bn), which is separate from the K-Dow deal, he added.

($1 = €0.71)

Additional reporting by Ryan Hickman

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By: Joseph Chang
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