Kuwait has scrapped a deal to buy a 50 percent stake in Dow Chemical Co.'s plastics-making unit, depriving Dow of $9 billion it planned to put toward the acquisition of Philadelphia-based 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, Mich., company said yesterday in a statement.
K-Dow was a key part of chief executive officer Andrew Liveris' plan to reduce Dow'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 its purchase of Rohm & Haas, said Sean Egan, managing director of Egan-Jones Ratings Co.
"It is doubtful that Dow will be able to easily raise the funds," Egan said in an e-mailed report. Dow has been "skewered," he said.
Rohm & Haas vice president Brian McPeak said last night that the Philadelphia chemical company was not part of the transaction between Dow Chemical and the Kuwait government and that Rohm & Haas expected to proceed with its own deal with Dow Chemical. McPeak noted that Rohm & Haas shareholders approved the $78-per-share acquisition by Dow in October.
Oil prices have collapsed since Dow Chemical agreed to acquire Rohm & Haas last summer. Dow won an auction for Rohm & Haas, one of the nation's largest specialty chemical companies, after the founding Haas family said it would like to diversify its assets.
Rohm & Haas is a major employer in the 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.
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.
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.
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 the 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.