Dow seals the deal on Rohm buy

By Frank Esposito
Senior Staff Reporter

Published: March 16, 2009 6:00 am ET

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After an abundance of drama, Dow Chemical Co.'s purchase of Rohm and Haas Co. will go through after all.

The $15.3 billion deal will close April 1, offering better financial terms for Midland, Mich.-based Dow, but also will result in the elimination of 3,500 jobs from the combined company. Those cuts are on top of 5,000 cuts announced by Dow and 1,500 announced by Philadelphia-based Rohm and Haas since late 2008.

The agreement resolves a lawsuit Rohm and Haas had filed against Dow. Under the new terms, two major shareholders in Rohm and Haas, the Haas family trust and Paulson & Co., will take a $2.5 billion stake in preferred shares issued by Dow. The Haas family also will make an additional investment of $500 million at Dow's option, according to a March 9 news release.

Other shareholders of Rohm and Haas will receive the originally agreed-upon $78 per share.

“By reaching agreement on the terms for this transaction, we have delivered excellent value to Rohm and Haas shareholders,” Rohm and Haas Chairman and Chief Executive Officer Raj Gupta said in the news release.

In a March 9 conference call with stock analysts, Dow Chairman and CEO Andrew Liveris said the most recent deal “is a pragmatic outcome, given current market conditions.”

Some of the job cuts will come from closing 24 offices and between 10 and 15 plants. Liveris added during the conference call that Dow “is in active dialogue with a number of joint venture partners” for its commodity plastics unit. He told Bloomberg News on March 11 that one of those potential partners is Petrochemical Industries Co. of Kuwait, the same firm that walked away from a similar deal in December, at the time sending the fate of the Rohm and Haas deal in doubt.

Liveris addressed commodity plastics during the conference call, saying that Dow “is not going to fire-sale these assets.”

“We're not assuming a sale in the near term,” he said. “We like the polyethylene business and, as the world's leading producer, we know how to run it.”

Liveris added that the PE market “is primed for a recovery.”

“There was extreme destocking [of PE] in the fourth quarter — 1 billion pounds in December alone,” he said. “That far surpassed other historical events, and it caused demand interruption in the value chain. But polyethylene has never been negative in back-to-back years, and we've already seen demand improvement in January and February.

“We're beginning to see some bright spots, and [U.S. federal] stimulus spending in infrastructure, housing and energy play to Dow's strengths.”

The combined firm will derive 60 percent of its sales and 70 percent of its pretax profit from specialty products. Currently, Dow gets 52 percent of its sales and 62 percent of pretax profit from that sector.

Estimated annual synergies in purchasing, shared service and governance and other areas will be $1.3 billion, or 14 percent of the deal's total value. Dow received 18 percent synergy value from its 1999 acquisition of Union Carbide Corp., officials said.

The combined firm's 2009 capital expenditure budget will be reduced from $2.3 billion to $1.1 billion. Dow also will save $1 billion by reducing its dividend by 64 percent. A 2009 salary freeze for all employees of the combined firm will provide another $200 million in savings.

Dow also will benefit from an increased presence in the Asia-Pacific region, where Rohm and Haas generates 24 percent of its annual sales. Dow currently generates only 12 percent of its sales from that region.

Not all market watchers were sold on the deal. At Banc of America Securities/ Merrill Lynch in New York, analyst Kevin McCarthy said that “risks still outweigh rewards” at Dow. McCarthy cited several reasons for his firm's view, including Dow's higher debt multiple when compared to an average of five comparable firms, including DuPont Co., Eastman Chemical Co. and Celanese Corp.

For his part, Liveris sounded like a triumphant general during the conference call.

“We are back in control of our own destiny,” he said.


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Dow seals the deal on Rohm buy

By Frank Esposito
Senior Staff Reporter

Published: March 16, 2009 6:00 am ET

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