Analysts question original Rohm & Haas price

NEW YORK - The collapse of a major joint venture between Dow Chemical and a state-owned Kuwaiti company raised questions today about Dow's continued willingness to pay $15.3 billion for Rohm & Haas Co.

The shares of both U.S. companies plunged more than 17 percent in midday trading.

Dow agreed to pay a 74 percent premium for the Philadelphia-based specialty chemical maker during the height of the energy crises in July, when the company was burdened by unprecedented costs for energy and carbon-based feedstocks.

One major deal in the chemical sector, a $6.5 billion bid by Hexion Specialty Chemicals Inc. (Columbus, Ohio) for Huntsman Corp. (based in Salt Lake City; operates out of the Woodlands, Texas) has already unraveled.

Rohm & Haas is a major employer in the Philadelphia region, with headquarters on Independence Mall, a research facility in Montgomery County, and operations in Bucks County and Delaware.

Chemical companies have reported sharply falling demand in the last month because of the weak global economy and cutbacks. Rohm & Haas shares closed at $63.56 on Friday, well off the $78-per-share deal price.

Kuwait's government on Sunday scrapped its planned $17.4 billion K-Dow joint venture, calling the deal "very risky" amid a global financial crisis and because crude prices have tumbled more than 70 percent since the agreement was announced.

Dow had expected to get as much $9 billion in pretax proceeds from the deal.

Dow officials would not comment and it remained unclear today whether the world's second-largest chemical company intended to scuttle the agreement.

Rohm & Haas said it "continues to work diligently" to complete the acquisition, which it said was not affected by the K-Dow venture.

Some analysts believe it would be unrealistic to expect the same price, however.

"There appears to be no way for Dow to unilaterally walk away from and/or terminate the merger agreement with Rohm & Haas," Deutsche Bank analyst David Begleiter said in a note to investors.

It's more likely the deal will be renegotiated for under $70 per share, he said.

Dow agreed to pay $78 per share, a huge premium over Rohm & Haas' $44.83 closing price on July 9.

Dow said at the time that buying Rohm & Haas would allow it to cut costs and provide a cushion from the volatile chemicals market.

The economy has since deteriorated rapidly.

Dow Chemical Co. has said it will cut 5,000 jobs, 11 percent of its work force. It also closed 20 plants and idled 180 more.

Still, should Midland, Mich.-based Dow complete the buyout it would eliminate a longtime opponent in the competitive chemical sector.

A Rohm & Haas buyout would also let Dow better compete with Germany's BASF SE, the world's largest chemical company.

Barclays Capital analyst Sergey Vasnetsov said the K-Dow collapse should not affect the Rohm & Haas buyout due, in part, to outside financing from Warren Buffett's Berkshire Hathaway and the Kuwaiti government.

Berkshire Hathaway committed $3 billion in preferred securities, an investment that would make it the largest Dow shareholder if the deal closes.

A Berkshire Hathaway representative was not immediately available for comment.

The Kuwaiti Investment Authority - a wealth fund run by the Middle Eastern country's government - committed $1 billion in convertible preferred securities. It was not immediately clear whether Kuwait intended to stand by that agreement, as political pressure in that country helped sink the K-Dow venture.

Debt financing had been committed by Citigroup, Merrill Lynch and Morgan Stanley. A spokeswoman for Citi and Merrill Lynch declined to comment, and a Morgan Stanley representative was not immediately available.

The Haas family, descendants of one of the specialty chemical maker's founders, holds about 65 million shares of Rohm & Haas, a 33 percent stake worth nearly $5.1 billion based on the purchase price.

Based on the per-share purchase price and the roughly 196 million shares Rohm and Haas had outstanding as of April 22, the deal is worth about $15.29 billion. The companies have said assumed debt will boost the total value of the transaction to about $18.8 billion.

Under the deal, Dow said it plans to establish an advanced materials business unit at Rohm and Haas' current headquarters in Philadelphia and to contribute some Dow businesses to Rohm and Haas' existing portfolio, such as coatings and personal care. The total revenue of that new unit is expected to approach $13 billion.

Dow shares were priced at $15.37 (down $3.55, or 18.76 percent) at midafternoon today. Shares of Rohm & Haas, which were down by as much 25 percent today, were priced at midafternoon at $53.44, down $10.12 (15.92 percent).