Dow/Rohm and Haas deal will close despite spread

By Joseph Chang

NEW YORK (ICIS news)–Dow Chemical’s $18.8bn (€13.5bn) acquisition of US specialty chemicals giant Rohm and Haas will likely go through as planned at the same $78/share price, despite a widening merger arbitrage spread, an analyst said on Tuesday.

Shares of Rohm and Haas were down by 21 cents to $66.40 in Tuesday afternoon trading, widening the gap between the current price and Dow’s agreed-upon price of $78/share for Rohm and Haas.

A widening merger arbitrage spread indicates that investors are sceptical the deal will get done or that the deal will be completed on the stated terms.

“Dow has acknowledged they are paying a full price, but to the extent that the deal is predicated on a long-term strategy, there is little chance it won’t get done and at the $78 price,” said Dmitry Silversteyn, an analyst with Longbow Research.

The analyst gave less than a 10% chance the deal would fall apart and less than a 5% chance that the price would be renegotiated lower.

“There is no incentive for Rohm and Haas to accept a lower price,” Silversteyn said.

However, the analyst said Dow could try to offer a portion of the price in stock rather than all cash.

“Rohm and Haas could be receptive to Dow stock, but I don’t think they will accept a lower price,” Silversteyn said.

On December 2, Dow chairman and CEO Andrew Liveris said in an interview with ICIS that he would not look to renegotiate the deal with Rohm and Haas, focusing instead on cost synergies.

With Rohm and Haas trading at $66.40 and the deal price at $78, the merger arbitrage spread is $11.60, or 17.5%, for a deal that is expected to close in the first quarter of 2009.

Assuming the deal closes in three months on the original terms, investors in Rohm and Haas at the current price would earn an annualised return of 52%.

The recent falling apart of another high-profile chemical merger, Huntsman and Hexion Specialty Chemicals, may be spooking investors, Silversteyn said.

Hexion’s owner, Apollo Management, settled its merger dispute with Huntsman for $1bn and agreed to terminate the merger.

“People are looking to the Huntsman/Hexion deal and thinking that there’s some chance the Dow/Rohm and Haas deal won’t get done. But this is an entirely different situation,” Silversteyn said.

“There is no reason this deal won’t get done amicably,” he said.

($1 = €0.72)

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