Dow Chemical moves to Plan B

Economic growth, Financial Events, Leverage

A month ago, after the collapse of the K-Dow deal, the blog suggested that Dow would need to move quickly to a Plan B. It added that “nobody would be very surprised if it now sought to renegotiate the proposed Rohm & Haas acquisition”. This now seems to be underway, judging by two pieces of evidence:

• An interview with Dow’s CEO, Andrew Liveris, in the Wall Street Journal (WSJ) where he says that Dow are “unable to complete the deal without stable financing”.
• An analysis by the New York Times’ (NYT) legal expert that suggests “Dow is worried about compliance with its $13bn bridge facility (and)…is using this worry to attempt to force Rohm to the table”.

The issue is one of leverage. The Bridge facility has a covenant that requires Dow to maintain its Total Leverage Ratio below 4.25: 1.00, if Dow’s debt ratings reduce to a certain level (BBB- from S&P, for example). At the moment, S&P rates Dow just one notch above this at BBB, but the NYT notes that “more downgrades” are possible.

At this point, the NYT suggests Dow “conceivably gains a solvency argument” to use in any negotiations with R&H. Was Liveris preparing the ground for this, when he told the WSJ, “Why would you put two more American companies at risk in this most horrible of markets?”

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