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Dow Chemical ends year wresting with ugly surprise

Dow Chemical ends year wresting with ugly surprise

A year-end surprise has left the largest U.S. chemical company scrambling to salvage a deal it had hoped would make riding out a recession a little easier.
Following the collapse of a $17.4 billion joint venture with a state-owned Kuwaiti company, Dow Chemical must weigh taking on more debt than it wanted, entering intense negotiations to restructure a buyout of rival Rohm & Haas, or both.
Shares of Rohm & Haas soared by the greatest amount in two months Tuesday, signifying pressure on Dow to complete the deal.
And if Dow delays a decision, it could lose money.
Under an agreement signed with the Philadelphia-based specialty chemicals maker, the original buyout price of $78-per-share will rise each day that Dow fails to sign off on the deal after Jan. 10.
Dow agreed to pay a 74 percent premium for Rohm & Haas during a summer when all chemical makers were burdened by unprecedented costs for energy and carbon-based feedstocks.
That environment has changed radically. Energy prices have tumbled and the global economy has deteriorated badly, two reasons given by Kuwait to dump its agreement with Dow late Sunday.
Dow had expected more than $7 billion in cash from the joint venture. While the company claimed that money would not be needed for the Rohm & Haas deal, its absence leaves a large hole in its balance sheet.
"We see a potential setback for Dow to raise the required financing for the (Rohm & Haas) deal in the current credit environment and without the proceeds from the K-Dow joint venture," HSBC analyst Hassan Ahmed said in a note to investors.
Both Dow and Rohm & Haas declined comment Tuesday. Dow said Sunday it was reviewing its options, while Rohm & Haas said the collapse of K-Dow had no relation to its acquisition by Dow.
Dow could choose to enter messy litigation with Kuwait for a $2.5 billion breakup fee, but at the same time must decide what to do about Rohm & Haas, which still has a very big price tag given the current economic climate.
Dow has access to a $13 billion loan to complete the Rohm & Haas acquisition, but cash from the Kuwait joint venture would have made it a lot less painful.
Dow's predicament prompted both Moody's Investors Service and Standard & Poor's Ratings Services to cut the company's credit ratings this week to several notches above junk status.
"We also view this development as a setback to Dow's strategy to transform the business profile, as the completion of the K-Dow venture would have substantially muted Dow's exposure to the current petrochemical downturn," wrote S&P's credit analyst Kyle Loughlin.
The acquisition of Rohm & Haas would cushion the company somewhat from commodities-based prices swings that come with the products it makes.
Dow has limited options: buy Rohm & Haas as planned, a move which could leverage its balance sheet by $29.6 billion; push hard for new terms with Rohm & Haas; or walk away from the deal, which would create its own legal mess.
Dow had initially planned to only pull as much as $6 billion from the $13 billion bridge loan for the Rohm & Haas acquisition, with the rest of the cash presumably coming from the K-Dow venture. Warren Buffet's Berkshire Hathaway was set to provide $3 billion, and a Kuwaiti investment fund put up $1 billion.
There is a $750 million breakup fee that comes with walking away from the deal.
"If Rohm & Haas becomes concerned enough, maybe even the price, or the all-cash structure of the deal, could be renegotiated," Buckingham Research analyst John Roberts said in a note to investors.
Alternatively, if Dow reports dismal fourth-quarter results several banks, including Citigroup, Merrill Lynch and Morgan Stanley, might try to claw back the $13 billion bridge loan that had been offered in better times, forcing Rohm & Haas to renegotiate or litigate, Roberts said.
Rohm & Haas shares jumped more than 11 percent, or $6.11, to $59.45 on Tuesday, after falling 16 percent the day before. Dow's stock rose 13 cents to $15.45 after dropping 19 percent Monday.
Rohm & Haas' largest shareholder, Wachovia's Evergreen Investment Management Co., declined to comment on the acquisition.
Thomas W. Haas and David W. Haas, descendants of co-founder Otto Haas, sit on the company's board of directors and own about 300,000 shares each. Neither were immediately available for comment.
Rohm & Haas employees own about 6 percent of their company through a stock-ownership plan.