World Business

With a central picture of its asset-light strategy eliminated, analysts wonder how the chemical giant be able to withstand the economic downturn

By David Bogoslaw

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The fallout from the global financial crisis has claimed yet another victim. The Kuwaiti government’s 11th-hour cancellation of a $17.4 billion internode venture puts a boastful crimp in Dow Chemical’s (DOW) long-nurtured strategy to cut extension costs and reduce its vulnerability to economic downturns by shifting focus from commodity chemicals to higher-margin specialty products. And with the Kuwaiti traffic kaput, another greater piece of Dow’s transubstantiation military science—its planned $18.8 billion acquisition of Rohm & Haas (ROH)—is after this in topic.

The Kuwaiti deal, along with the Rohm & Haas purchase, would bring forth increased Dow’sitting exposure to specialty chemicals from 55%, to nearly 75%, of its total business. The joint venture would be the subject of netted Dow $7.5 billion in pretax produce from the sale of a 50% stake in the estate of its five global businesses to the Petrochemical Industries Corp., or PIC, a utterly owned co-operating of the state-owned Kuwait Petroleum Corp., plus an additional $1.5 billion in cash that both partners planned to take out of the new copartnership.

The main reason the Kuwaitis cited for terminating the deal was the plunge in oil prices from the rich levels they were trading at when the K-Dow Petrochemicals joint venture was announced put on the eve a year ago.

Meanwhile, there has been hindrance to Dow Chemical’session plan to buy Rohm & Haas even before the financial crisis escalated in September and accelerated the economy’session downward spiral. The price according to Rohm & Haas —$15 billion in cash plus $3.7 billion in assumed debt, or $78 per allotment—was a bit rich for Dow shareholders to stomach and the merger was regarded as too damaging to earnings over the two years after the deal would have closed. That had put Dow’s shares under pressure since the dispense was announced in July.

In response to the news, Barclays Capital Equity Research lowered its opinion on Dow Chemical shares to equal weight from overweight on Dec. 29, citing the society’s downside exposing. to the slide in the commodity chemicals market, without the benefit of more than $7 billion of expected cash and a higher debt ratio from the pending Rohm & Haas acquisition.

The merger agreement with Rohm & Haas wasn’t predicated on the union venture closing, and with a $13 billion bridge loan more $4 billion in proceeds from preferred shares still in place, Dow has the financing needed to complete the acquisition, Deutsche Bank Securities algebraist David Begleiter wrote in a Dec. 29 research diplomatic communication. It will be difficult for Dow to bound the deal, given the terms of the merger agreement that gives Rohm & Haas the advantage.

Other analysts are less optimistic. While the Rohm & Haas merger wasn’t contingent on the Kuwaiti deal closing, "we believe the proceeds from the JV [joint venture] were in essence earmarked for funding it," Frank Mitsch, managing director of BB&T Capital Markets in New York, said in a Dec. 29 note. Dow secured financing for the acquisition in July end a combination of a $3 billion investing. by Berkshire Hathaway (BRKa), $1 billion from Kuwait, and $13 billion in 12-month bridge financing. "We believe securing long-term financing to replace the build a bridge over would be especially problematic in the current environment," Mitsch reported in his note. "If this scenario were to play out, we give faith to the share would suitable be a goner, and so could Dow," which could be forced to drastically cut costs by dint of. possibly cutting more than 25% of Rohm & Haas’ 16,500 employees.

Original text: http://www.businessweek.com/investor/content/dec2008/pi20081229_676346.htm?campaign_id=rss_null