INSIGHT: Dow can do without PIC

06 January 2009 16:14  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Dow Chemical is right to pursue legal action following the collapse of its pivotal K-Dow joint venture with Kuwait’s Petrochemical Industries Company (PIC).

The world’s number two chemicals maker cannot afford to be sidelined at such a difficult time as it pursues an asset-light and more market-oriented focus. The force of reason is on its side given the way in which it has had every right to have believed that the deal would go through, although it may be difficult to ultimately secure any recompense for its prospective Kuwaiti partners.

Dow says now that it can accelerate a process to find a new partner for at least parts of this package of its upstream olefins and polyolefins assets, most notably the basic polymers business that includes polyethylene. It says that it was approached by interested parties other than PIC about that business as recently as November last year.

K-Dow was all but off the starting blocks when Kuwait’s Supreme Petroleum Council withdrew its support for the deal on 28 December. It had taken more than a year to put the mechanisms of the venture into place, to split legal, manufacturing and management functions ahead of the launch.

Dow wants not only to pursue its asset-light goals – to put upstream, commodity-oriented businesses into so-called “asset-light” joint ventures. These had been made with feedstock-advantaged PIC as a partner. Dow wanted, as CEO Andrew Liveris explained in December, to tap such feedstock-attractive synergies further, possibly with other assets in North America and Western Europe.

That strategy need not necessarily be in tatters, but decisive action of the type envisaged by Dow and Liveris is now required.

Dow wants to close its acquisition of Rohm and Haas but must be wary of taking on even more debt at a time when, in any business, cash is so vitally important.

Even the giants are not immune from the harsh downturn being experienced by all chemicals players currently. There are also no signs that the industry environment will improve any time soon; indeed, operating conditions are likely to get worse before they get better.

Dow understands this, and the management team must have the interests of the company and of its shareholders at heart. It is reckoned that planned actions on cashflow and operating earnings will let Dow continue to pay its quarterly dividend as it has done since 1912. But management also notes that it wants to maintain Dow’s investment grade rating

Pursuing a claim against PIC, which financial analysts have suggested could be worth as much as $2.5bn, makes great sense. If Dow is right, then it can strike an agreement with other interested parties and do so relatively quickly.

However, Dow also needs to renegotiate the Rohm and Haas deal to reflect current realities.

At the operating level, so much has been done already that a new partner for the plastics businesses included in the K-Dow venture could be accommodated quickly. Liveris has spoke of his desire of more “virtual” upstream integration that would link Dow’s petrochemicals assets with competitively priced feedstocks, but it now looks as though this will have to remain wishful thinking.

Dow says that interest has been shown in joint venturing for the basic plastics businesses. It adds that identification of an alternative joint venture partner for those businesses, “combined with the acceleration of planned divestitures and several additional divestments that are consistent with the company’s strategy, will yield proceeds greater than the funds Dow expected to receive in connection with the K-Dow joint venture" – so more than $7.5bn.

The other businesses that could be sold have yet to be indentified externally. But in its joint venture agreement announcement at the beginning of last December, Dow said that K-Dow would be a leading global supplier of “essential petrochemicals and plastics and will manufacture and market polyethylene, ethyleneamines, ethanolamines, polypropylene and polycarbonate, and will also license polypropylene technology and market related catalysts”. The other businesses Dow has planned to divest are included in the Dow Optimization Portfolio segment.

"We were shocked by this news, and this was completely unexpected given the approvals already received and the behaviour, actions and words from our partners,” Liveris said on Tuesday.

“We have over 1,500 documents prepared for closing for what we believed to be Day 1 of K-Dow Petrochemicals on 2 January. Pursuing legal options is not a decision we take lightly, especially because of the longstanding partnerships we have established in Kuwait over the past decade, but PIC is in breach of contract, and we must take action to protect the interests of our company and our shareholders."

Unfortunately, Dow had taken its time with Kuwait, not so much in putting the ultimately complex joint venture in place but in agreeing basic terms as late as December 2007. It has paid the price in the face of the downturn, the drop in the oil price and the credit crunch. It has to work fast now to salvage as much as possible from a disappointingly difficult situation.

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By: Nigel Davis
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