INSIGHT: Dow makes progress with Rohm and Haas but at cost

10 March 2009 15:31  [Source: ICIS news]

By Nigel Davis

Lightning over a Dow plantLONDON (ICIS news)--Whichever way you look at it, Dow is paying a great deal to create a new advanced materials segment for its portfolio and to get just that much closer to the customer.

The re-negotiated agreement with Rohm and Haas has to be welcomed in that it removes tremendous uncertainty for two good companies. But the episode has dealt Dow a significant blow and it will have to live with the consequences through extremely difficult times.

Dow's inability to complete its asset light joint venture with Kuwait’s Petrochemical Industries Co (PIC) created a big enough strategic bind for the world’s second largest chemical company. It also failed to deliver the cash that would make the Rohm and Haas acquisition work.

Dow looks now, however, as though it can avoid further strategic problems as it pushes hard to fund the acquisition.

Dow is forced move swiftly to pay down the $12.5bn (9.6bn) bridging loan taken to fund the Rohm and Haas deal. Dow says it will do that by accruing $4bn from divestments, by issuing $4.3bn of new debt and by new equity inputs and cash savings.

The total cost of the acquisition has racked up to $15.4bn including the $300m 'ticking' fee payable because Dow did not complete the deal on time.

Given the terms of the new agreement it expects to draw down $9.5bn on the loan on 1 April when it completes the acquisition. But by the end of June it should have only $4bn of the loan outstanding which with the issuance of new debt will be at zero by the year end.

No one in the chemicals sector would deny Dow’s ability to make progress on operational efficiencies and deliver significant cost savings.

It has pushed up its operational synergies goal from the Rohm and Haas deal to $1.3bn from $910m, a 43% increase. The new cost savings include a further 3,500 job losses, the closure of between 15 and 20 plants and consolidation of six research and development laboratories. Purchasing savings of such chemicals as propylene, acetone and additives could be significant.

But what could have caused Dow a great deal of trouble and had the potential to do a great deal of harm was the pressure to sell assets driven by the need to service the significantly increased debt burden.

Dow now appears to have the plans in place to fund the acquisition with the minimum of disruption to the portfolio. The forced divestment of a prize asset like Dow AgroSciences looks highly unlikely, which has to be positive for the long term.

Dow says it is “very progressed” with the sale of a 45% stake in TRN, a Dutch petroleum refining partnership with energy giant Total.

Preliminary talks have begun on the sale of some equity stakes in olefins and derivatives ventures in South East Asia. Dow does not identify the assets involved but has joint ventures in Malaysia (Optimal) and Thailand (with Siam Cement).

Bids have been submitted, Dow says, for the Rohm and Haas Morton salt business.

In addition, the list of $200m-500m assets Dow might sell has been narrowed to six from 12, CEO Andrew Liveris says.

Liveris also is indicating that Dow will take its time on moving ahead with an asset light joint venture to potentially mirror that it had negotiated with PIC. Negotiations are ongoing with two “oil and gas oriented state owned enterprises”, he says.

Dow has been linked in recent weeks with Saudi Aramco and Oman Oil, two state-owned companies with which it already has joint venture projects.

If the right deal is not concluded in this down cycle, Liveris is indicating that it can wait until the upturn.

Rohm and Haas should mean a lot to Dow and will help generate an $18bn advanced materials portfolio selling into markets such as industrial coatings, specialty packaging and water. Indeed, the rationale behind the acquisition has not changed; and businesses such as these could be particularly important through an extended downturn.

"Rohm and Haas is a strong operational and strategic fit for Dow and is a critical component of the company's long-term transformational strategy,” Liveris said in a press statement on Monday.

“This combination brings together the two companies' best-in-class products and technologies, broad geographic reach, and well-developed channels to market. As a combined entity, we will form a world-class platform with significant long-term growth potential,” he added.

But Dow agreed to buy Rohm and Haas at the cycle peak and before the credit crisis hit. It has to pay the consequences now of the failed PIC venture and its $78/share offer.

Dow has to move fast and conclude some important deals if it is to clear its debts quickly. But alongside the recasted Rohm and Haas deal it has swiftly negotiated a 12 month extension to the bridging facility - so long as it can push the principal on the loan below $8bn - and an increased debt to EBITDA (earnings before interest, tax, depreciation and amortisation) coverage ratio, just in case.

Dow was caught unawares at the end of last year during what Liveris has called: “that famous week”. The CEO believes Dow has filled a void left by the Kuwaitis. The renegotiated Rohm and Haas deal is, he says, “a pragmatic outcome for all parties involved”.

($1 = €0.79)

For more on Dow Chemical and Rohm and Haas visit ICIS company intelligence
To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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