Dow Chemical Takes Hit as Kuwait Deal Derails
DECEMBER 30, 2008
By KEITH JOHNSON
online.wsj.com
Dow Chemical Co. took hits to its credit rating and its stock price as the cancellation of a Kuwaiti joint venture sparked concerns about the company's debt load.
The Kuwaiti venture would have given Dow cash to help acquire specialty-chemical maker Rohm & Haas Co., which is a big part of Dow's effort to overhaul operations and increase profit. Dow shares fell $3.60, or 19%, to $15.32, and Rohm & Haas shares tumbled $10.22, or 16%, to $53.34 in 4 p.m. composite trading Monday on the New York Stock Exchange.
The $15.3 billion Rohm & Haas acquisition wasn't contingent on the Kuwaiti joint venture going through, but Dow had earmarked about $9 billion from the venture, known as K-Dow, to finance the takeover. Dow had secured a $13 billion bridge loan and $4 billion in other financing to fund the acquisition.
Dow executives had said they planned to use only $4 billion to $6 billion of the bridge financing, with the Kuwaiti deal covering the bulk of the Rohm & Haas price. The 12-month bridge loan, from a consortium of 19 banks, appears firm. But if the Rohm & Haas acquisition proceeds without the money from the Kuwait venture, analysts said, Dow would greatly increase its debt. After the close of regular trading, Standard & Poor's Ratings Service lowered its rating on Dow's debt to two notches above junk territory. Moody's Investors Service cut Dow's rating to three notches above junk.
Without the Kuwaiti cash, Dow would see its borrowing costs soar in the tight credit market -- to $2 billion from $500 million, by one reckoning. That could threaten the company's stock dividend, which Dow has paid uninterrupted for 97 years.
"If this scenario were to play out, we believe the dividend would likely be a goner, and so could Dow," Frank Mitsch, managing director of BB&T Capital Markets, wrote Monday. Dow Chief Executive Andrew Liveris said recently that Dow wouldn't reduce its dividend on his watch.
Another option is for the Midland, Mich., company to try to renegotiate the $78-a-share price or persuade Rohm & Haas to kill the deal.
"An overly aggressive management team can essentially undermine the financial stability of a great company like Dow," said Michael Judd, an analyst with Greenwich Consultants LLC. "I am concerned that management has put Dow in a very precarious situation."
Dow spokesmen declined to comment on Rohm & Haas. Investors and analysts said Dow executives said nothing has changed regarding Rohm & Haas. A spokeswoman for Philadelphia-based Rohm & Haas said its deal isn't affected by K-Dow's demise.
The pact between Dow and Rohm & Haas calls for the acquisition to be completed Jan. 10. Dow could walk away by paying a $750 million breakup fee if the deal falls apart for regulatory reasons. But if Dow killed the deal for other reasons, it could face a lawsuit from Rohm & Haas. Dow would also see the $78-a-share price rise if the deal isn't completed on time.
Oppenheimer Co. analyst Edward Yang said the July deal was signed "a lifetime ago," when crude oil was trading at nearly $150 a barrel and developing economies were still growing rapidly. "From a pragmatic standpoint, $9 billion is a big hole to fill," Mr. Yang said. Crude settled at $40.02 Monday on the New York Mercantile Exchange.
Earlier this month, Dow renegotiated the Kuwaiti venture's terms to reflect lower values for the plastics-manufacturing assets at the project's heart. But Kuwait pulled the plug on K-Dow Sunday after the Kuwaiti Parliament questioned the government's investment. It was unclear whether Dow will get a breakup fee.
—John Kell contributed to this article.
Write to Keith Johnson at keith.johnson@wsj.com
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