Kuwait's Cancelled Venture With Dow Also Damaging Rohm & Haas

Kuwait’s decision to end a $17.4-billion petrochemical joint venture with The Dow Chemical Co. (DOW) is not only doing damage to shares of the U.S.-based diversified chemical company, but also Rohm & Haas Co. (ROH), which Dow had plans to buy.

It also has negative implications for other ethylene producers like Calgary-based Nova Chemicals Corp. (NCX), according to Citigroup’s P. J. Juvekar. “It shows that North American ethylene assets are less attractive to Middle East buyers,” the analyst told clients. He maintained a “sell” rating on pure-play commodity producers Nova and Georgia Gulf Corp. (GGC).

The move comes as a huge surprise following a re-valuation of the deal this month. Meanwhile, the Rohm Haas acquisition, which is expected to be completed in early 2009, now appears extremely overpriced given a deep recession and lack of cash from the Kuwait deal, Mr. Juvekar noted.

“DOW should be looking to protect its shareholders by cutting the ROH deal at a lower price or walking away from the deal by paying a break up fee,” he said. However, it may not be easy since there is no “buyer’s remorse” clause in the merge deal, nor a material adverse change trigger. Nonetheless, the analyst now expects lengthy negotiations between the two companies.