FocusWall Street cold on Dow/Rohm and Haas deal

10 March 2009 19:51  [Source: ICIS news]

Dow site in Midland, Michigan(adds background paragraph 3)

NEW YORK (ICIS news)--Dow Chemical’s settlement to acquire Rohm and Haas for $78/share (€62/share) in the form of cash and preferred shares was underwhelming, considering the high price, potential dilution to Dow shareholders and cost of servicing the preferred stock, Wall Street analysts said on Tuesday.

“In a game of brinksmanship, Dow may have blinked by agreeing to go through with the overvalued $78/share acquisition of Rohm and Haas,” said BB&T Capital Markets analyst Frank Mitsch.

Dow's settlement followed a suit filed in Delaware Chancery Court by Rohm and Haas, which wanted Dow to complete the deal. Judge William Chandler III oversaw the case.

“We’re not quite sure that the apparent concessions received were not worth casting aside and forcefully presenting its case to Judge Chandler,” he added.

Oppenheimer analyst Edward Yang said Dow is paying roughly 3-6 times fair value for Rohm and Haas.

“We had wrongly believed that they would renegotiate the price,” Yang said.

On 9 March, Dow agreed to close its acquisition of Rohm and Haas by 1 April. As part of the agreement, two of Rohm and Haas’s largest shareholders – the Haas Family Trusts and Paulson & Co – have agreed to buy $2.5bn in perpetual preferred equity in Dow. In addition, the Haas Family Trusts have agreed to buy an additional $500m in Dow common stock, at Dow’s option.

Dow is essentially paying the equivalent of $63/share in cash and $15/share in preferred stock, the company said. Dow will also pay the 8% annualised ticking fee to Rohm and Haas shareholders, costing it roughly $275m.

Mitsch called the deal “clearly dilutive” to Dow shareholders.

“Our back-of-the-envelope calculation of dilution is around $0.40/share in year one,” he said.

“This doesn’t take into account the greater dilution that we believe could come if Dow reports big earnings, as its share count could significantly ramp up as the $500m in potential common stock finds its way to the Haas family, and the $550m in stock goes to the Rohm and Haas ESOP [Employee Stock Ownership Plan], which at $6/share, in total would add around 10% to the shares outstanding,” Mitsch added.

Dow is already issuing $3bn in preferred stock to Warren Buffet’s investment vehicle, Berkshire Hathaway, and $1bn in preferred stock to the Kuwait Investment Authority (KIA).

Mitsch noted that the preferred stock payments and interest payments on debt could amount to about $1.4bn/year for Dow.

JPMorgan analyst Jeffrey Zekauskas called Dow’s settlement a “Pyrrhic victory”.

Additional costs connected to the transaction, including the ticking fee and the funding of the Rohm and Haas ESOP will raise the cost of the acquisition by an additional $1bn to about $19.3bn, representing a multiple of 16.1 times estimated 2009 Rohm and Haas earnings before interest, tax, depreciation and amortisation (EBITDA), Zekauskas said.

Deutsche Bank analyst David Begleiter said he does not expect value creation from the deal until the seventh year after closing.

He lowered his 2009 earnings per share estimate on Dow from 50 cents to breakeven, and cut his 2010 estimate in half to $1.00.

However, Buckingham Research analyst John Roberts said there is “substantial long-term value in Dow stock, which is at levels last seen in the early 1980s, and first seen in the early 1970s”.

Dow’s annualised dividend of 60 cents, which represents a yield of nearly 9%, is “fairly secure”, Roberts said.

Shares of Dow were up 33 cents, or 5%, to $6.66 in Tuesday afternoon trading.

($1 = €0.79)

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By: Joseph Chang
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