Kuwait and Dow Chemical Deal Will Get Done Despite Opposition

Despite opposition from a small group of lawmakers, the deal will get done.

From the Kuwait Times:

KUWAIT: More lawmakers yesterday pressed the government to scrap a multibillion-dollar deal Kuwait signed with US giant Dow Chemical (NYSE:DOW), but the oil minister defended the deal, saying it passed through proper channels and was of great strategic importance for the country. "We are going ahead with the deal in accordance with the signed agreement," Mohammad Al-Olaim told a press conference, saying the deal took two years of negotiations and studies with the assistance of the best international consultant houses

Meanwhile, a government official revealed that the government is reportedly set to enter negotiations with the Dow over the controversial penalty clause. Cabinet members also want to discuss the details of expected returns from the deal and to reevaluate Dow's assets and performance in order to ensure there are sufficient guarantees for the deal to go ahead or to withdraw totally from the deal before the January deadline.

At the press conference, Olaim said the project was first approved by the Petrochemicals Industries Co [PIC] and later by Kuwait Petroleum Corp [KPC] before sending the project to the Supreme Petroleum Council [SPC]. After discussing it, the SPC asked the company to renegotiate its value in light of the global financial crisis and PIC managed to reduce Kuwait's share from $9 billion to $7.5 billion, he said.

When PIC sent the final proposal to SPC, it proposed three options: either to reject the deal, wait and see how the crisis develops or approve it. The SPC sanctioned the deal and it was signed last month, he said. The deal will enable PIC to be a partner in 40 plants spread in the United States, Chile, Argentina, Canada, Holland, Spain and Germany, besides owning the finest technology in the field. "The new company, K-Dow, is expected to become one of the five largest global petrochemical companies," Olaim said.

He said that the documents of the deal were referred to the Audit Bureau in line with a law that requires oil companies to refer their projects to the bureau after they were ready. Olaim said that debate about the deal is acceptable "since we are in a democratic country", but insisted that the "current environment is not conducive to development projects because of the high dose of politics".

The minister said that certain newspapers have been targeting him because of things he has done to safeguard national and public interests, especially with the petition he filed against the ruling on the Kuwait Oil Tanker Company case. "They want me to pay the price for what I did to safeguard public funds in my capacity as oil minister," said Olaim, who warned that the media was being used to influence the outcome of major contracts. "We must not politicize technical issues," the minister said.

PIC chairwoman Maha Mulla Hussein said that Kuwait will not be required to pay a penalty of up to $2.5 billion if the Kuwaiti government rejects the deal before the start of next month, when the deal becomes officially effective. Olaim however made no direct reference to calls by MPs on the government to scrap the deal.

On Sunday, the Popular Action Bloc said it will grill the prime minister if the government does not scrap the deal before January 1 in order to avoid paying the penalty. The bloc said that the value of the deal was highly exaggerated since the market value of Dow Chemical dropped from $51 billion in 1997 to around $17 billion currently.

Islamist MP Khaled Al-Sultan yesterday charged that the plants Dow is contributing to the deal "are old and operate with outdated technology", saying the decision to enter the joint venture "is not a wise investment". Another Islamist MP, Abdullatif Al-Ameeri, said the deal is shrouded in many suspicions, adding that it is not feasible to buy 40-year-old plants in Europe and the United States when there are new plants in Asia. Ameeri said the internal rate of the project was initially set at 8-10 percent and after the global crisis it will drop sharply to around five percent. The lawmaker alleged that Dow Chemical offered the partnership to a neighboring country for $4-5 billion but it was offered for $9 billion to Kuwait.

MP Mohammad Al-Obeid said there are major problems and loopholes in the mechanism of the government's dealing with public fund-related issues, such as the mystery surrounding the fourth refinery project, the Amana company and the K-Dow deal. The MP said the K-Dow deal raises several question marks about its economic feasibility and its importance while the world is experiencing a troubled financial situation. Al-Obeid questioned the wisdom of injecting $7.5 billion into the petrochemicals industry which is currently suffering from severe crises because of plummeting oil prices. He said that he would submit a parliamentary question about KPC's investment strategy in the petrochemicals industry and its economic feasibility, as well as the legal procedures in the K-Dow project.

Fellow MP Musallam Al-Barrak said the only person who can save Kuwait and Kuwaiti people's money from the K-Dow deal is the premier, who has the authority to do so. He said that partnership with this company would be harmful, adding that its factories were over 20 years old. Al-Barrak questioned the abnormally fast rate at which the high-ranking oil officials have been conducting the deal, with meetings being held between them daily, saying that this confirms that the K-Dow project is going ahead without a ny regard of the Cabinet.

Meanwhile, the Fatwa and Legislation Department has announced that the contract is unique and unfair to Kuwait. It said that whoever conducted the negotiations on KPC's behalf did not have sufficient knowledge of contractual law and that this should not have been the case, particularly in such a major and important deal. The department has asked that the contract be systematically reviewed before coming into effect since its current conditions are unfairly harsh on Kuwait. It also said that that choice of timing for signing the contract was wrong, given the economic downturn which all companies are currently suffering the effects of.

The deal will be final in eight days. It has passed an exhaustive process for approval and despite a few lawmakers who can get the press's ear, nothing from anyone with authority to actually do anything ought to lead investors to think other wise.

It is akin to Rep. Elijah Cummings going on CNBC and bitching about the AIG (AIG) situation and making threats. Ok, thank you for your opinion now go sit down please. Unless your name ends in Frank or Dodd in the House of Representatives, or you are the head of a Committee, your opinion and threats are ,well, just more noise.

Let's do a worse case scenario. Say it doesn't. Dow gets the $2.5 billion breakup fee, calls off the Rohm and Haas (ROH) deal, pays them the $400 million breakup fee and walks with $2.1 billion. Now, with the company currently valued at $17 billion, Dow could take that money and just buy back 12% of the stock. Is that so bad? I don't think so.

There will be demand for these assets. There is no rule saying that if this deal dies there will not be another one 6 months from now.

Disclosure: Long DOW

Comments

[Tom Armistead:]

Good article, I am long DOW and had been worrying about whether the two deals would close. The price for Rohm and Haas seems steep but the deal makes good strategic sense and with the cash from the K-Dow they can afford if.

I was not aware of the breakup fees, it seems like DOW can't get hurt no matter how this plays out.

2008 Dec 24 11:38 AM

[najdorf:]

Look, no one is going to tell you that there isn't potential upside in a company like DOW down as far as it is and yielding 10%. But this author has been pumping since 40, regardless of the news. There are plenty of things that can go wrong with Dow, most of which involve completing bad deals due to stubborness. The worst case scenario is:

1. Dow gets hosed even worse than they already are by the Kuwaitis and ultimately has to accept poor terms in the K-Dow deal.

2. Dow borrows a ton of money at high rates.

3. Dow completes ROH deal at absurd full price.

4. Management pays itself huge bonuses for deal-making "success".

5. Dow fails to delivers synergies and struggles to endure a long downturn in the chemical industry.

In this scenario, Dow has no alternative but to cut the dividend and might have to sell assets at fire sale prices in order to service debt and keep capital-hungry businesses alive. Dilutive share issue probably follows. Bankruptcy is not likely but possible.

The problem here is that the Kuwaitis and ROH have all the leverage in the negotiations due to Dow's insistence of taking on transformative change in the midst of the worst economic downturn since the Depression. Without both deals Dow is just another plodding chemical company with no edge. The Kuwaitis have already been able to talk Dow way down on price, while Liveris and Co. have obviously indicated that they're so desperate for Rohm that they'll do anything. If management had any sense they'd go to Rohm and say "Take 70 or watch us release a statement saying we're re-evaluating the deal, followed by your shares going to 30." Of course, if they had any sense they never would have cut a deal at 78 (massive premium to ROH's all-time high, of course) during the worst market downturn since the depression.

2008 Dec 26 01:01 AM

[Jamaican in...:]

If this deal ever becomes a reality I would be surprised. People sometimes fail to realize how important religion is and how much it influences government policy. Right now the Islamic parties are holding the line, and stalemating every initiative that apprears pro-western. The Islamic parties are hoping to gain more influence through populist appeal and are using the Israeli/Hamas confrontation to consolidate their influence especially since the Kuwaiti executive has no real cabinet currently. The Prime Minister, who supports the deal wiht Dow Chemical has been weakened, and was recently forced to tender his resignation.
This deal is essentially a "proxy war" of sorts between pro-western forces and pro Islamic forces in Kuwait's government. Kuwait's economy has taken a beating as a result of the fall in oil prices, and the Islamic politicians are suggesting that the failure to prepare for the impact that the fall in oil prices is having on the economy is the pro-western Prime Minister's fault.
I would be very surprised if this deal succeeds.

2008 Dec 29 06:00 AM

[petetoth:]

oops, hope the 2009 predictions go a bit better...

2008 Dec 29 09:17 AM