Dow: Best Case Is for Both Deals to Get Done

Kuwait reneges on Dow deal, and now Dow's dividend is being called into question, possibly affecting the Rohm & Hass (ROH) deal.

Kuwait needs to look past today. This was the first mega scale JV in the country and based on current actions, may be the last for a while. Let's not forget Dow currently has JV's in Saudi Arabia, Russia, South America and China proceeding without delay or problems. The Saudi deal at Ras Tanura is nearing first stage completion. Does anyone really think Dow CEO Andrew Liveris has not picked up the phone and called them or even Dubia to inquire about another partnership?

Let's move outside of Dow. If you were GE (GE) or another oil or chemical major, how eager are you now to call Kuwait to form any type of partnership? Kuwait does not seem to understand that they do not have all the oil, and they do not have the technical expertise they would have received from Dow.

As for the dividend, it is Liveris' word now. It cannot be cut. He has staked his reputation and word on its safety.

Rohm & Hass (ROH). Liveris has spent the last few years fixing Dow's balance sheet. I'm not convinced the advantages of buying Rohm at these prices justifies the damage that would be done to it now without the Kuwait money. Let's be honest, nobody in their right mind is going to buy Rohm at these prices anytime soon (2 years) anyway. That is a tactic that can be used to lower the price. If Dow walks away and pays the $750 million breakup fee, that comes to 5% of the deal price. If Rohm goes back on the market, they will be lucky to get the 40% discount the shares are currently trading at to the deal price.

If Dow walks, Rohm shareholders suffer far more than Dow's do. I think it is safe to say the current depressed Dow share price reflects the pessimism over the deal today, getting rid of the deal ought to boost share price.

As bad as it does seem, Dow does have some leverage. Rohm needs the deal currently more than Dow does. Dow could also do considerable damage to Kuwait's reputation in the business community should it choose to fight for the $2.5 billion breakup fee as in a court hearing, all internal communications will become public and the meaningless assurances from Kuwait will be known to all. I'm not sure Kuwait really understands how much trust is involved in business and without it, how difficult it will become to do future deals.

The best thing for all parties is for both deals to get done in some form...

Disclosure: Long DOW

Comments

[Steven Hansen:]

Todd, the difference on the kuwait jv is that ground has not broken. if i were a partner i would wait and see how the economic things play out before i kicked in $8 billion.

2008 Dec 31 05:44 AM

[maelstrom:]

Thanks for your insight.. I ve been on the fence for days re. DOW

2008 Dec 31 07:29 AM

[BlueOkie:]

DOW will take years to recover and reorganize. If it cuts it dividends, more people will exit their positions.

2008 Dec 31 08:49 AM

[funfun:]

Todd Sullivan,

Well analysed size-up of the situation!

Dow as second largest chemical enterprise in the world, with BASF number one, has substantial resources and appears to be very modestly valued for an eventual global economic recovery. ...funfun..

2008 Dec 31 08:56 AM

[real money:]

Dow-Back out of the deal. Have Kuwait pay your breakup fee to Rohm. $750 million to save their reputation and stay out of court. Pay your dividend to save your reputation with stockholders. Revisit M/A at todays prices.

2008 Dec 31 10:51 AM

[danS:]

I don't understand why the Haas family trust (which owns 1/3 of Rohm and Haas) does not agree to use the portion of the money they are getting in the deal (roughly 5 billion dollars) for preferred shares in Dow or to make a loan to Dow. Rohm and Haas would end up getting more money from the deal than agreeing to negotiate a lower price or from a lawsuit against Dow for backing out of the contract.

Jan 01 04:19 PM