Kuwait to Pay Dow $9.5 Billion in Plastics Venture

Kuwait to Pay Dow $9.5 Billion in Plastics Venture

Dec. 13 (Bloomberg) -- Kuwait agreed to buy half of Dow Chemical Co.'s plastics assets for $9.5 billion, the biggest overseas investment by a Kuwaiti company.

Dow, the largest U.S. chemical maker, rose the most in five years in New York trading after announcing it will form a joint venture with Kuwait's Petrochemical Industries Co. The Safat, Kuwait-based company will gain a 50 percent stake in businesses that generated 22 percent of Dow's sales last year, Midland, Michigan-based Dow said today in a statement.

Persian Gulf states, flush with cash from oil revenue, have doubled their overseas investments to a record $74.5 billion this year, including today's deal, Bloomberg data show. Dow Chief Executive Officer Andrew Liveris said the new venture will have access to cheaper raw materials, and Dow will use the cash to buy specialty-chemical assets.

``It's a decent deal,'' Steve Hoedt, an analyst who helps manage $34 billion in private investments at National City Corp., including 2.4 million Dow Chemical shares, said today in a phone interview. ``North American companies don't have access to the low-cost feedstocks that companies in the Middle East do, so it makes a lot of sense for Dow to do transactions like this.''

The venture will employ 5,000 and include all Dow's plants that make polyethylene, polypropylene and polycarbonate plastics, as well as intermediate chemicals known as amines, the company said.

Shares Climb

Dow Chemical rose $3.28, or 7.9 percent, to $45:03 at 10:48 a.m. in New York Stock Exchange composite trading. A close at that price would be the biggest percentage gain since October 2002. Before today, Dow had gained 4.6 percent in 2007.

``This is a landmark deal,'' Liveris said in a phone interview. ``Apart from the cash, the half we still own will be enormously benefited by Kuwait Petroleum's oil and gas position in future projects, not just the ones in Kuwait, but elsewhere, like in China.''

Kuwait Petrochemical Industries will provide the venture with raw materials through its owner, Kuwait Petroleum Corp., which is building refineries in emerging regions, the companies said. Kuwait Petrochemical refineries may provide half of the raw materials for the venture in 10 to 15 years, Liveris said.

Sales from specialty products, such as insulation and water- treatment filters, will rise to two-thirds of Dow's total from half after the transaction closes late next year, Liveris said in the interview. Dow will continue to get half of the earnings from the basics venture.

Transforming Dow

Liveris said the deal shows that the market undervalues Dow, because Kuwait has valued one-quarter of Dow's business at half the company's market value. In January, the CEO promised to transform Dow to reduce wide swings in profit when prices for commodity chemicals, such as ethylene, reach a cyclical trough.

``This marks an important milestone in our transformational strategy: growing our basics businesses through joint ventures; reducing our capital intensity; and freeing up cash to invest in our portfolio of performance and market facing businesses,'' Liveris said in the statement.

At $9.5 billion, the Dow agreement is the second-biggest acquisition by a Gulf investor after Saudi Basic Industries Corp.'s $11.6 billion purchase of General Electric Co.'s plastics unit this year.

`More Deals'

``We will see more deals like this and there are a lot of talks going on in Qatar, Oman and elsewhere,'' Abdullah bin Zaid al-Hagbani, secretary-general of the Gulf Petrochemicals and Chemicals Association, said in reference to the Dow joint venture.

Dow first partnered with Kuwait in their Equate plastics joint venture a decade ago, Liveris said.

The U.S. chemical maker postponed an investor meeting in October, fueling speculation that the company was working on a major transaction.

Dow is the world's largest producer of polyethylene, the most-used plastic, and the largest maker of amines, which are used in wood treatments, drug processing, paints and consumer products. Polyethylene is used in milk jugs, pipe and plastic bags. Polypropylene is used in fibers, plastic films and car parts, while polycarbonate is used to make CDs, among other applications.

Dow has room to increase borrowings to finance acquisitions of specialty-chemical producers, Chief Financial Officer Geoffery Merszei said last week.

Consumer-Oriented

Liveris in October repeated a January pledge to change Dow's business mix so earnings won't drop to less than $2 to $3 a share when chemical prices fall, perhaps by 2010. Profit excluding certain items tumbled as low as 34 cents a share in 2002, when chemical and plastic demand slumped.

Liveris is creating new consumer-oriented units to serve coatings and footwear markets, modeled after agro-science, automotive, building-solutions and water-solutions divisions that focus on specialty products with higher profit margins.

The company has announced joint ventures this year in Saudi Arabia, China, Libya and Brazil, adding to alliances in Kuwait and Malaysia, to cut project costs, access cheaper raw materials and serve faster-growing markets. Dow's costs for energy and chemical ingredients surged to $22 billion last year from $8 billion three years earlier.

Dow said last week its plastics venture with Chevron Phillips Chemical Co. probably will begin operating by March. Americas Styrenics will make polystyrene, a hard plastic used in packaging and insulation, in the Americas, reducing costs in a low profit business, the companies have said.

BLOOMBERG