Dow Chemical Needs Some Black Magic
HEARD ON THE STREET
DECEMBER 29, 2008, 3:14 P.M. ET
By LIAM DENNING
online.wsj.com
Andrew Liveris should give Leon Black a call.
The Dow Chemical chief executive could probably use some tips on extricating his company from takeover terms struck in happier times. Mr. Black's Apollo Management recently got out of buying Huntsman Specialty Chemical despite the target's apparent determination to force completion of the deal.
Dow now faces a similar conundrum with regards to buying Rohm & Haas. The added twist is that Kuwait has backed out of the separate "K-Dow" petrochemicals joint venture. Without the $7 billion of after-tax proceeds from that deal, Dow's sums look a lot tougher.
In theory, it still has funding to complete the Rohm deal. At the $78 per share price struck in July, Rohm's enterprise value, including net debt, is $18.4 billion. Dow has lined up a $13 billion loan and a $4 billion preferred equity infusion. Moreover, Kuwait could owe up to $2.5 billion in penalty payments for walking out on K-Dow.
But as 2008's record number of broken deals demonstrates, what looks sound on paper doesn't always translate to reality. Kuwait's politicians will hardly relish paying the penalty fee. Dow could face a long legal battle if it tries to recover it.
Were Dow to now press ahead regardless, it would be left with net debt topping $29 billion, or 4.5 times estimated 2009 earnings before interest, tax, depreciation and amortization, according to Bank of America. That is very risky during such economic uncertainty. When Dow announced the deal, it forecast an industry trough in 2010 or 2011, not a sudden slump next year.
Yet, as Dow said, this deal offered an "unbeatable combination," central to Mr. Liveris's strategy of moving his company away from commodity products to less cyclical specialty chemicals. Rather than simply pay the $750 million breakup fee, therefore, he may try to negotiate new terms with Rohm.
At the current Rohm share price of about $54, Dow would save $4.7 billion. Rohm's shareholders, meanwhile, would still get 17 times 2009 earnings and a 20% premium to the preannouncement stock price. Absent a deal, it might sink to a sector multiple of 10 times, implying $32 a share. That suggests a lot of room to renegotiate -- provided adjusted terms wouldn't allow the banks, led by Citigroup, off the hook for financing.
As Mr. Liveris tries to balance all this, he must also consider Dow's quarterly dividend, which he has pledged not to cut. With the rhetoric level so high, and the economic outlook so grim, he might want to study Jon Huntsman's behavior. After all, he vowed not to allow Apollo to walk away from buying his company -- until reality got in the way.
Write to Liam Denning at liam.denning@wsj.com
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