Kuwait Scraps Dow Venture, Imperiling Rohm & Haas Bid

Kuwait Scraps Dow Venture, Imperiling Rohm & Haas Bid


Dec. 29 (Bloomberg) -- Kuwait scrapped a deal to buy a 50 percent stake in Dow Chemical Co.'s plastics-making unit, depriving the largest U.S. chemical producer of $9 billion it planned to put toward the acquisition of Rohm & Haas Co.

Kuwait's Supreme Petroleum Council reversed last month's decision to approve the venture, to be called K-Dow Petrochemicals, the Midland, Michigan-based company said in a statement yesterday.

K-Dow was a key part of Chief Executive Officer Andrew Liveris's plan to reduce the company's reliance on commodity products and gain access to lower-cost petroleum, used to make chemicals. Dow now might face a cash shortfall to complete the purchase of Rohm & Haas it agreed to in July, analysts said.

``Dow will probably re-evaluate the deal,'' said Danny Ho, a Taipei-based analyst at Yuanta Securities Co., Taiwan's biggest brokerage. ``They're tighter in funds, and their outlook on the industry must have changed. There's such a big difference in the industry between now and July, when oil was $147 a barrel.''

Crude oil futures in New York have dropped 74 percent from the record $147.27 a barrel in July on signs that a deepening global recession is cutting demand for fuel and energy. Oil reached a four-year low of $32.40 on Dec. 19. Crude for February delivery was at $38.77 at 12:32 p.m. in Singapore.

``It is doubtful that Dow will be able to easily raise the funds,'' Sean Egan, managing director of Egan-Jones Ratings Co. said in an e-mailed report. Dow has been ``skewered,'' he said.

Rohm & Haas

Brian McPeak, a Rohm & Haas spokesman, and Dave Winder, a Dow spokesman, both declined to comment yesterday.

Rohm & Haas issued a statement today saying the aborted deal ``is not a closing condition for the proposed merger'' and that it ``continues to work diligently towards completing the proposed transaction with Dow in early 2009.''

Dow in July agreed to buy Rohm & Haas, a maker of materials used in paints and electronics, for $15.4 billion and assume $3.4 billion of debt. Dow would be able to complete the Rohm & Haas transaction even without the Kuwaiti money, Liveris said when the deal was announced.

Dow plans to fund the Rohm & Haas purchase with a $13 billion bridge loan, a $3 billion equity investment by Warren Buffett's Berkshire Hathaway Inc. and a $1 billion investment by the Kuwait Investment Authority. Dow would need only about $5 billion of the bridge loan with the Kuwait proceeds, Chief Financial Officer Geoffery Merszei said Oct. 23 on a conference call.

`Extremely Disappointed'

Kuwait's state-owned Petrochemical Industries Co. was to pay $7.5 billion for a 50 percent stake in Dow plants and technology used to make commodity plastics and other products. The venture would pay each partner $1.5 billion, boosting Dow's net proceeds to $9 billion and reducing Petrochemical Industries' net cost to $6 billion.

``Dow is extremely disappointed with the decision by the Kuwait Government and is in the process of evaluating its options pursuant to the joint venture formation agreement,'' Dow said yesterday in the statement.

Dow would receive more than $2 billion if Kuwait breaks the deal, Liveris said in a Dec. 18 interview. Either side can claim as much as $2.5 billion if the other cancels the transaction, Dow said in a Dec. 1 regulatory filing.

Shares Decline

Dow rose 23 cents, or 1.2 percent, to $19.34 on Dec. 26 in New York Stock Exchange composite trading. The shares have declined 53 percent in the past year. Rohm & Haas fell 32 cents to $63.56. Dow in July agreed to buy Philadelphia-based Rohm & Haas for $78 a share.

K-Dow would be the world's largest producer of polyethylene plastic, used in milk jugs, food packaging and plastic pipes. The venture would employ more than 5,000 people and have annual revenue of about $15 billion, including $4 billion from the addition of two prior partnerships between Kuwait and Dow.

Dow on Dec. 1 announced it cut the original $9.5 billion price that Petrochemical Industries was to pay because of the weak economy and declining oil prices. Kuwait's Supreme Petroleum Council approved the transaction at the reduced price, and the agreements were signed Nov. 28.

The Kuwaiti government has been under pressure from opposition lawmakers to scrap the deal, which they said was overpriced. Some members of parliament threatened public questioning of Prime Minister Sheikh Nasser al-Mohammed al-Sabah, a nephew of Emir Sheikh Sabah al-Ahmed al-Sabah, Kuwait's ruler. They said the investment was too large at a time of falling oil prices.

Maha Mulla Hussain, Petrochemical Industries chairman, has said the venture would allow Kuwait to diversify its economy's focus on oil and gas to petrochemicals and plastics. Petrochemical Industries is a subsidiary of Kuwait Petroleum Corp., the state oil company.

``With the business environment worsening rapidly everyday, I won't be surprised to see more of such projects being reviewed,'' Hirofumi Kawachi, an energy analyst at Mizuho Investors Securities Co., said in Tokyo today. ``Demand even in Asia, where the growth prospects were once assured, now shows some contraction and it's hard to go ahead with projects.''

BLOOMBERG