Dow Chemical Says 'See You in Court' to Kuwait

I hope people are not surprised by this. The question here is not about the court case, but of how much damage Kuwait wants done to its reputation in the international community as a potential business partner.

The News:

On December 31, 2008, Dow Chemical (DOW) received official written notice from Petrochemical Industries Company [PIC] of Kuwait that the closing must be postponed because the Kuwaiti Supreme Petroleum Council withdrew its earlier approval of the transaction. As a result, Dow has said it will seek to enforce its rights under the terms of the various agreements and the JVFA executed by Dow and PIC since the joint venture partnership was first announced in December 2007.

"We were shocked by this news, and this was completely unexpected given the approvals already received and the behavior, actions and words from our partners. We have over 1,500 documents prepared for closing for what we believed to be Day 1 of K-Dow Petrochemicals on January 2," said Liveris. "Pursuing legal options is not a decision we take lightly, especially because of the longstanding partnerships we have established in Kuwait over the past decade, but PIC is in breach of contract, and we must take action to protect the interests of our company and our shareholders."

Beyond K-Dow: New Partnerships, New Opportunities

Although Dow is prepared to close K-Dow immediately if PIC does indeed cure the breach of contract, the Company has already been approached by other interested parties about joint venturing with Dow for the basic plastics businesses. As a result, Dow has also announced it will establish a formal process to secure a joint venture partner to accomplish the goals of its asset light strategy. The core businesses involved in the K-Dow joint venture include strong Dow franchise businesses, among them the largest and strongest producer of polyethylene in the world. Polyethylene is the world's largest thermoplastic and for the last several decades has grown well above global GDP.

"Prior to signing the definitive agreement with our Kuwaiti partners about the K-Dow joint venture, we had other options and partners to consider," Liveris said. "Some of these discussions were active as recently as November, and we have already been contacted by other interested parties and have begun discussions. This can be done on an accelerated timeline due to the considerable groundwork that has already been established in anticipation of the K-Dow joint venture."

Dow believes that the identification of an alternative joint venture partner for Dow's basic plastics business combined with the acceleration of planned divestitures and several additional divestments that are consistent with the Company's strategy will yield proceeds greater than the funds Dow expected to receive in connection with the K-Dow joint venture.

Now it was just three weeks ago Dow and Kuwait finalized the JV and set up shop in Michigan. It was a done deal and Dow's actions are about that.

When the Kuwait action was first announced I said:

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 Dubai to inquire about another partnership?

Yesterday's statement confirms Dow is talking to other potential partners. Who called who first is irrelevant. Dow has options.

Prediction? What Dow wants is the $2.5b breakup fee from Kuwait. It will then create a JV with another partner at a lower price than the $7.5b Kuwait was going to pay Dow. The new partner gets a great deal, Dow gets its money and at the same time sticks its finger in the eye of the Kuwaitis.

OR

Kuwait realizes they are doing more damage to themselves than any present deal could do, wants to avoid the discovery process in court (or Dow making public the 1500 pages of communications it has with them) that would lay bare their deception to the world and capitulates on the deal, perhaps restructuring it, not for a lower price but delaying some payments to the JV.

This is a game of chicken now and unfortunately for Kuwait, Dow has an out in another partner. Can Kuwait really afford to let the chance to get these assets go? They can't.


Disclosure: Long DOW

Comments

[Jamaican in...:]

You know, it would be easy to agree with you if I were to only look at the numbers, and I believe that DOW's position has been made stronger now that it has an alternative to Kuwait. Here is the problem, geopolitical considerations sometimes interfere with what would otherwise be good business decisions.
Let us look at three significant recent geoplitical facts:
The Israeli/Palestinian war.
The Russian decision to cut off of gas to Western Europe.
The anticipation that oil prices will rise.

Let us briefly look at these three factors, and notethat the condition on the ground is much more complex, but these provide an explanation into what many who pay attention to economic data might fail to realize.

1. The Israel/Palestinian conflict is part and parcel of what some people in the region see as an ongoing Arab-Israeli disagreement. Islamic parties are using this and other military operations to push Kuwait away from the west. As the government weakens, tribal alliegances and Islamic Parties strengthen. An ex Kuwaiti Oil Minister wrote an editorial (www.arabtimesonline.co...) highlighting the role of tribalism and religious parties in an era when the government has become weak. i Religion, tribalism and an age old conflict are competing with sound fiscal considerations and influencing government decisions in Kuwait.

2. As winter deepens, and energy supplies fall in Europe due to the disagreement between Russia and the Ukraine, European policy makers have been scrambling to find alternative energy suppliers for the anticipated fall in supplies of natural gas. Guess what is the best next available substitute for natural gas... you got it, oil. In the short run, oil cannot be easily substituted for natural gas, because plants will have to be modified, new infrastructure built etc... but it is providing an opportunity that OPEC is desperately seeking to increase the demand for oil even as industrial production and associated demand for energy falls.

3. The anticipation that oil prices will rise. Kuwait is in the enviable position of producing oil at about $20 per barrel, so even when oil fell to less that $40/ barrell Kuwait continued to make almost 100% profit on each barrel of oil it produced. Most forcasters believe that as the international economy recovers, that the demand for oil and other natural resources will increase, and it is likely that oil may command a price of between $60 and $70 per barrel in late 2009, providing a tremendous increase in revenue and financial resources at its government's disposal.
Add to that fact, that Kuwait is fiscally very conservative. Unlike other major oil producers like Iran and Venezuela, the Kuwaiti's typically do not have budget crisis, infact they frequently understand thier budgeted outlays by as much as 30% (www.ameinfo.com/32099....), so when other OPEC nations struggled to meet obligations, Kuwait had few concerns.

Kuwait can afford to pay the cost of breaking this agreement without significantly weakening itself financially in the short term, and it has many cards to play in this matter. I believe the Kuwaitis would be making a mistake in the long term to abandon this deal... but the fact is that they can afford to do it without too much pain in the short term, and too frequently we note that policy makers opt for short term satisfaction rather than exercising good judgement that would be helpful in the long term.
Can I predict the how likely DOW will be in convincing Kuwait to honor its obligation? No, but I would not hold my breath in anticipation that the Kuwaiti government will come to the table and try to revive the deal. My gut tells me that they are going to pay up and walk. This is just a gut feeling.

Jan 07 08:40 AM