Firm outlines strategy for Dow to close Rohm and Haas deal

05 February 2009 17:38  [Source: ICIS news]

HOUSTON (ICIS news)--The second largest shareholder of Rohm and Haas, Paulson & Co, has proposed a way for Dow Chemical to close its $18.8bn (€14.7bn) merger with the speciality-chemical producer, according to a letter the investment-management firm released on Thursday.

Rohm and Haas sued Dow in Delaware Chancery Court, after Dow missed a 27 January deadline to close the merger. Dow had warned that closing the merger now would endanger the viability of the combined company.

As it is, Dow would have to close the deal without the proceeds it would receive from the failed K-Dow Petrochemicals joint venture, which it was to form with Petrochemical Industries Co (PIC) of Kuwait.

Under the joint-venture agreement, Dow was to receive $7.5bn from PIC and a $1.5bn cash distribution from K-Dow Petrochemicals.

With the $9bn out of the picture, Dow would now rely on a $13bn bridge loan to help fund the merger, a troubling prospect since that loan would mature on 14 April 2010. In general, financial markets will remain tight through 2009, making it difficult for companies to refinance debt, according to Jack Williams, a law professor at Georgia State University. Williams is also a resident scholar at the American Bankruptcy Institute.

Moreover, Dow would attempt to refinance the loan under dreadful economic conditions, which it described during a conference call concerning its fourth-quarter earnings.

Regardless, Dow can still close the merger by taking several steps that would reduce its reliance on expensive bank financing, Paulson said.

Dow can reduce its dividend to 1 cent/share, down from the 42 cent/share dividend the company declared on 11 December.

The reduction would save Dow $1.6bn/year, allowing it to achieve roughly $7bn in savings within four and a half years, Paulson said. Those savings would replace most of the proceeds Dow was to receive from the K-Dow Petrochemicals joint venture.

Dow could raise more money by selling $4bn of new common equity, Paulson said. Depending on the terms, Paulson said it would "seriously consider participating in any equity offering".

In addition, Dow can issue bonds, tapping into the healthy market for investment-grade debt, Paulson said. Dow could raise $5bn through bonds.

Dow's debt would preserve its investment-grade status - if it follows Paulson's advise of reducing its dividend and issuing equity, Paulson said.

The steps outlined by Paulson would allow Dow to repay $10bn of the bridge financing, the firm said. Dow could repay the remaining $3bn by issuing more stock or by relying on hybrid securities.

"In short, a combined Dow Rohm and Haas would have numerous opportunities to refinance all or part of the bridge loan in the equity, bond, term bank loan or hybrid security markets," Paulson said.

In a statement, Dow said it was not working with Paulson. However the company said it is "actively engaged in exploring all options that will enable both companies to close this transaction with the confidence that the combined entity will thrive and prosper".

($1 = €0.78)

For more on Dow or Rohm and Haas visit ICIS company intelligence
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By: Al Greenwood
+1 713 525 2645

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