2008 has not been a good year for M&A in the chemical sector. First, there was the collapse of Hexion's Huntsman acquisition. Today, the Kuwait government has signalled its intention to "scrap" its $17.4bn deal with Dow to form K-Dow.
This is a quite extraordinary decision by a major Middle East government, especially as it comes just 2 days before the JV was due to begin operations. Citing "major changes in the world economy, the serious impact of the global financial crisis on the assets of companies and the sharp slide in oil prices", the government says it has decided that "going ahead with this deal involved big risks".
But none of these risks are new. And none of them have suddenly appeared in the last few weeks, since the K-Dow JV was finalised earlier in December. The real reason, as the Kuwait Times notes, is undoubtedly that pressure on the deal has since been mounting in the National Assembly, with opposition MPs threatening to "grill the prime minister (in the Assembly) if the government did not cancel the deal".
The cancellation of the deal at this late stage is clearly a lose-lose for both parties. It is clearly very damaging to Kuwait's reputation in world markets. Kuwait also loses its chance to further develop a leading global position in petchems, whilst Dow loses the support it would have found from allying its petchems business with a strong upstream partner.
But Dow is still the world's No 2 chemical company. And it will no doubt have developed a contingency plan, in case the K-Dow venture did fall through. It could, for example, step-up the current relationship with Saudi Aramco, its partner in the $20bn Ras Tanura project. And nobody would be very surprised if it also now sought to renegotiate the proposed Rohm & Haas acquisition.