Kuwait's Desperate Attempt to Save Its Reputation 32 comments
an article to
-
Font Size:
-
Print
- TweetThis
This is about as transparent as it gets...But, it could lead to something.
The Kuwait Investment Authority would consider increasing its support for Dow Chemical’s (DOW) disputed takeover of Rohm and Haas (ROH) if the terms of the deal were changed to account for the downturn, a person familiar with the matter says.
Dow failed to complete the $15bn (€11.5bn) deal after the collapse of a joint venture between Dow and PIC – an arm of the Kuwaiti Petroleum Corporation – that was supposed to contribute $7.5bn to help pay for the acquisition. Warren Buffett has agreed to contribute $3bn and the KIA was to have added $1bn. According to a person with direct knowledge of the matter, the KIA would consider putting up more money if there were new terms.
“Today, it is very difficult to complete this deal on the old terms,” this person added. “There would have to be a new price and new terms. The environment has changed so much and chemical companies are losing so much money.”
Rohm and Haas underlined the brutal conditions faced by the sector, reporting an 81 per cent fall in fourth quarter earnings from continuing operations.
The figures make it harder for Dow to justify paying its original price for the company. Rohm shares fell more than 1 per cent to $55.70 at midday in New York, well below the $78 per share Dow agreed to pay last year.
The KIA had not approached Dow to discuss increasing its investment in the deal, Dow said. It is also highly unlikely that KIA on its own would put in anything like the $7bn to $8bn Dow would need to close the Rohm deal.
However, an increased investment by the KIA strikes many analysts as an elegant solution to the break-up of the Dow-PIC joint venture.
“There is a concern as to Kuwait’s reputation for direct foreign investment,” says Ahmed Barakat, managing partner with Al-Sarraf & Al-Ruwayeh in Kuwait City who is not directly involved in the matter. “KIA could salvage that reputation.”
Initial talks between the Kuwaitis and Dow began in 2007. In November 2008, the deal was renegotiated to reduce the Kuwaiti contribution to $7.5bn from $9bn in recognition of the deterioration in the economy.
Even the revised terms, however, met with criticism in the Kuwaiti parliament, where questions were raised about the price tag and a $2.5bn break-up fee.
Dow has until July to take advantage of its one-year bridge loan for the deal. It reported a $1.55bn fourth quarter loss.
What do we really have? Kuwait has finally realized what is obvious to everyone else. They have done irreparable harm to their reputation as a business partner. At all cost, they want to avoid the coming legal confrontation with Dow. Why? Discovery will lead to disclosure on internal communication with Dow and their deception will be laid bare for the world to see.
Recent accusations from Kuwait of bribery from Dow officials and "reviewing" other upcoming ventures only served to further cast doubt on the country as a business partner in the international community.
This "offer to help" is an olive branch to Dow. What will happen is Kuwait will commit more funding for the Rohm deal and in return, Dow will drop its seeking $2.5 billion in damages. Despite what Kuwait has done, they are still a valuable partner for Dow although Kuwait must now see that Dow does have options as it has been confirmed the company is talking to Sabic (Saudi Basic Industries) to purchase two commodity businesses Kuwait had been scheduled to buy. One must come to the conclusion the Kuwaitis thought they were the only dance partner Dow had.
Dow dropping the lawsuit lets Kuwait off the hook and clears the way for future collaborations, a positive for both parties. Like I have said all along, this will all get worked out...in due time...
Disclosure: Long DOW
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
Please dont bullshit your way about industries you dont understand - moron
Anyone holding corporate debt, a valid contract with arguably similar rights to M&A deals, would tell you that anything is amendable. Anything.
On Feb 11 01:21 PM UserThunderBolt wrote:
> The manipulation of the financial press is absolutely horrific. I
> read the Reuters news and Dow Jones news and am stunned at the amount
> of "opinion" and spin put out by "unnamed or anonymous sources close
> to the situation." The fact remains that ROH has a solid agreement
> and all the wishing in the world won't change the price tag. However,
> the unfortunate part of this M&A process is that a great many
> scared ROH shareholders have sold their positions prematurely as
> a direct consequence of the manipulative stories spewing forth from
> the financial press like so much raw sewage. It is truly disgusting.
I would argue that he is incorrect: There are a ton of institutional investors, pension plans, mutual funds, etc. there are holding ROH shares indirectly. Hence, by extension, the larger public has a stake in seeing the integrity of this deal upheld.
Please don't confuse KIA participation with KPC. KIA was always a part of the R&H deal, even in announcements from July 2008.
Given the coupling of this prior stupidity with current market conditions, one could easily add two and two together and see that there are some major obstacles to what was once considered a done deal.
I didn't follow the Busch-Inbev deal closely, but I do not recall any events even close to paralleling what is going on here. From my passing observation, it was a cookie-cutter merger, one of the larger ones in recent times. But that's it. You could have cited any one of hundreds of prior mergers, and gotten the same answer from me.
I am also all for a deal being a deal, and would say that ROH rightfully has the upper hand. But, any deal can face a myriad of circumstances that would force some sort of adjustment necessary for it to complete, obviously with the advantage going to the party that did not default. If the deal simply cannot complete, it can be broken, probably with a large penalty, which would benefit ROH shareholders - they would have essentially received a large cash bonus while running business as usual. Ownership matters, as cited by your opinion piece, are inconsequential.
What you seem to be advocating, however, is that an ironclad deal cannot break under any circumstance, and that DOW must complete the deal come hell or high water. Anything is breakable. The only question is at what cost. I believe DOW can easily survive such a hit to their balance sheet, and wait for another day to complete the deal, if it came to that. I believe that even with such a hit, DOW is undervalued at a price below 10, although I am aiming more for 5. I completely agree with you that ROH should have the upper hand in this deal, and that DOW's management royally screwed up the terms in this merger, given their own conditional financing.
I would like to hear your unbiased opinion on this. I obviously have my own interests at stake.
On Feb 11 05:16 PM UserThunderBolt wrote:
> I am a disintered party who formerly owned Anheuser Busch prior to
> their merger with InBev. In contrast to the way DOW is behaving,
> InBev bit the bullet and honored their contractual obligations. DOW's
> attorney offered up this gem: "We believe that the suit represents
> the narrow interest of current (seekingalpha.com/symbo...)
> shareholders who won't have any concern with the company after it
> is merged,".....
> I would argue that he is incorrect: There are a ton of institutional
> investors, pension plans, mutual funds, etc. there are holding ROH
> shares indirectly. Hence, by extension, the larger public has a stake
> in seeing the integrity of this deal upheld.
>
On Feb 10 03:39 PM UserThunderBolt wrote:
> 78 will not be revisited. It is a firm price and the only ones who
> wish fervently for a lower price are the columnist above & CEO
> Liveris.
Taking a more emotive look at Dow's situation one has to ask, "what are they thinking" when they ask one court to help them gain restitution for the broken Kuwaiti deal, while they're in another court trying to break a deal they literally bent-over-backwards to get, in the face of a strong competitive bid from BASF.
Make no mistake: DOW as already bought ROH at $78 per share, it's just that Liveris has not been honest enough to pay for it.
Judge Chandler is not likely to be persuaded to reduce the Merger Agreement to an 'Option Contract'.
The financing risk pales in comparison to the potential for a forced closing PLUS a massive damage award.
DOW must make the best of a bad situation but that's what 'adult supervision' and Boards of Directors are for, Right?
IF (and it is a very big if) DOW can substantiate that the combined entity would destroy both companies, it is altogether likely to see a judge rule that the deal still close at $78, but that if the deal were to break, that the penalty would be less severe. I can easily see DOW getting slapped with a $2-3 billion penalty for its bungling of this merger, especially given terms in the contract penalizing DOW for $750 mil for other infractions. However, that is something that DOW can easily recover from in due time. A $15 billion impossibility is another matter.
If you truly are so 'disinterested' as you say, you would
1) allow for the possibility that equally disinterested parties oppose your position, or
2) take on both sides of the argument.
I for one at least have disclosed my position.
On Feb 13 03:16 PM UserThunderBolt wrote:
> Keep in mind that those who post in support of a lower M&A price
> sport one of two characteristics: They are either long dow, or are
> 'playing' options.
In a spirit of comity I must acknowledge that one line of reasoning in contract law cases supports --as I've stated in prior posts-- the possibility that the court will be reluctant to award ROH 'specific performance' and force the merger.
The legal reasoning is that an award of specific performance should be rarely granted because its enforcability depends to a great extent on the post-litigation good faith efforts of the loosing party and to the extent that any of the ordered 'performance' can be delivered in a half-hearted manner, then 'specific performance' will not be granted because it just won't work from the court's point of view.
In these cases, the court will award damages to give the winner the 'benefit of the bargain' (under the contract) in $. The most interesting legal question in a case like ROH/DOW may revolve around just this question: Can DOW's lawyers persuade the court that 'specific performance' just won't work? But even if that is the case under these facts (and IMO it is NOT the case) that merely gets DOW to a point in the litigation where, more likely than not, they will be ordered to pay crushing damages. By all accounts the likely computation of damages in this case would be in the minimum range of $4-$6 Billion. So it has consistently been my opinion that --unless DOW has some legal defense to the merger agreement-- they should close the deal because DOW will suffer all of the negative consequences of the closing (to credit rating and interest costs) WITHOUT the upside of owning ROH!
A truely horrid and stupid result for DOW shareholders but --come to think of it-- not at all inconsistent with Liveras' prior actions in negotiating this deal.
So if DOW is sucessful in this legal stunt and persuades Chandler not to force the merger, what is the likely result? Well it is a damage award that IMO will be even more adverse to DOW shareholders than going through with this clearly unfavorable merger. But don't be deluded into thinking that the court is going to reduce the value of that merger agreement to a an amount BELOW the 'benefit of the bargain' and that gets us right back to $78 per share (PLUS the damages for the delayed closing).
Any reasonable legal or equitable argument involving the merger agreement would seem to require this outcome.
Now, in fairness, DOW's lawyers have been more creative in their argument: they seem to be saying --foolishly IMO-- that the court should consider things like the poor state of the chemical business, the failure of the unrelated K-DOW transaction and even the 'global recession' to get DOW out of this bad deal but that poses a BIG PROBLEM for the court by setting the precident that the Deleware Chancery Court will grant relief from a valid and binding contract based not merely on the contract's terms or the 'equities' between the parties but will also look beyond both the contract and the parties to 'overall economic conditions' to deny a deal.
That IMO is a nonstarter: Chandler will have visions of a very long line of defendants forming outside his courtroom door -- and the subsequent demise of Deleware as the jurisdiction of choice for corporate transactions. I can say to that possibility --with reasonable certainty-- NEVER HAPPEN!
And yes, I've taken full accout of the fact that 'NEVER' is a very long time.
On Feb 13 03:55 PM Ricard wrote:
> Your opinion of this deal is much too biased to be taken credibly
> as a "disinterested party". An unbiased perspective would at least
> take other factors into consideration besides the one-sided argument
> that ROH close at $78. I would flip your argument and note that those
> wishing for ROH to close at $78 usually sport the characteristic
> of being a ROH shareholder, and are much, much, more inclined to
> arb through options than opposing parties.
>
> IF (and it is a very big if) DOW can substantiate that the combined
> entity would destroy both companies, it is altogether likely to see
> a judge rule that the deal still close at $78, but that if the deal
> were to break, that the penalty would be less severe. I can easily
> see DOW getting slapped with a $2-3 billion penalty for its bungling
> of this merger, especially given terms in the contract penalizing
> DOW for $750 mil for other infractions. However, that is something
> that DOW can easily recover from in due time. A $15 billion impossibility
> is another matter.
>
> If you truly are so 'disinterested' as you say, you would
>
> 1) allow for the possibility that equally disinterested parties oppose
> your position, or
>
> 2) take on both sides of the argument.
>
> I for one at least have disclosed my position.
>
Thanks for your comment. Admittedly I do not come from a legal background and am not fully aware of exactly how much of a damage claim DOW can be saddled with. I have been working with a number around $3 billion - a deservedly wide latitude from the $750m stated in the merger agreement. Given that ROH's operations were not materially affected by this merger, that would be free money for the corporation - ROH wins, and DOW loses.
I fully agree with your opinion that DOW's attempts to re-negotiate price seem foolhardy at best. I would imagine however that the judge would consider whether or not the combined entity would survive, given that his ruling would then become responsible for potentially tens of thousands of layoffs at ROH shareholder's expense.
How did you compute your number of $4-6 billion minimum?
If the claim is big enough, is there the possibility that ROH shareholders could use this claim and perform some sort of 'reverse merger' and buy DOW instead?
On Feb 17 12:16 AM Ricard wrote:
> HIGHWATER 888:
>
>
> How did you compute your number of $4-6 billion minimum?
>
Most observers think that a market price for ROH, without the pending merger, would be lower than the 52 week low ($44.13) to date for ROH, but just using a $30 something gap between the ROH merger price ($78) and the no-merger price (X 195 Million shares) gets you to the $6 Billion damage level.
Even though the damages 'math' is simple, a number of legal arguments would be advanced for a more complex (perhaps a 'moving average') calculation of an ROH share 'value' as opposed to a market share price on a specific date and this is the point at which 'damages' become very hard to calculate fairly: which, IMO, leaves the ROH lawyers with the PERFECT ARGUMENT (or counter argument) for the court granting specific performance (ie. the money damages are difficult to calculate).
However, any way DOW turns --law, equity, specific performance or damages-- it will be difficult to escape the $78 per share purchase price.
PS - While I don't think I would describe it as a 'reverse merger' a large damage award would certainly make ROH an 'owner' of DOW through a judgment lein which is, in effect, just another form of secured debt.
On Feb 17 12:16 AM Ricard wrote:
> HIGHWATER 888:
>
> Thanks for your comment. Admittedly I do not come from a legal background
> and am not fully aware of exactly how much of a damage claim DOW
> can be saddled with. I have been working with a number around $3
> billion - a deservedly wide latitude from the $750m stated in the
> merger agreement. Given that ROH's operations were not materially
> affected by this merger, that would be free money for the corporation
> - ROH wins, and DOW loses.
>
> I fully agree with your opinion that DOW's attempts to re-negotiate
> price seem foolhardy at best. I would imagine however that the judge
> would consider whether or not the combined entity would survive,
> given that his ruling would then become responsible for potentially
> tens of thousands of layoffs at ROH shareholder's expense.
>
> How did you compute your number of $4-6 billion minimum?
>
> If the claim is big enough, is there the possibility that ROH shareholders
> could use this claim and perform some sort of 'reverse merger' and
> buy DOW instead?