Deal or no deal? Rohm & Haas acquisition in disarray

The proposed $15.2 billion deal by Dow Chemical Co. to acquire Philadelphia's Rohm & Haas Co. was thrown into disarray yesterday as investors seemed convinced the deal couldn't proceed as originally envisioned this summer.

Rohm & Haas said yesterday it had no plans to change the terms, which have Dow paying Rohm's shareholders $78 a share. The stock has been trading well below that price and plummeted yesterday amid concerns over whether the acquisition was achievable.

Dow Chemical lost a major source of funding for the Rohm purchase when the government of Kuwait abruptly ended a joint venture with Dow on Sunday. A government-owned Kuwaiti business was to pay Dow $7 billion to $9 billion to create K-Dow Petrochemicals.

Dow's stock yesterday sank almost 20 percent, or $3.60, to $15.32 a share, and the company made no public announcement of its plans. The stock's 52-week high was $43.43.

Wall Street fears the Michigan chemical giant would now have to borrow heavily to acquire Rohm & Haas.

Dow Chemical chief executive Andrew Liveris has said that Rohm & Haas is central to restructuring the nation's largest chemical company into a specialty firm with higher profit margins and less exposure to commodity price cycles.

Frank J. Mitsch, chemical industry analyst with BB&T Capital Markets, said yesterday in a newsletter that Dow Chemical could eliminate 25 percent of Rohm & Haas' workforce in a spree of cost cutting if a debt-heavy deal goes forward.

Rohm & Haas employs about 16,000 around the globe. There are 3,100 at its headquarters, research facilities and manufacturing plants in the Philadelphia area.

"We believe Dow would be in drastic cost-savings mode," Mitsch wrote, noting that Dow's interest payments could skyrocket to $2 billion a year from $500 million if it followed through on the Rohm & Haas acquisition.

Sergey Vasnetsov, an analyst with Barclays Capital, said the deal could move forward. He cited Dow Chemical's having a one-year bridge loan for the transaction, as well as other investors, including investment guru Warren Buffett.

John P. McNulty, an analyst with Credit Suisse, said Dow Chemical "may have a tough time pulling out" of the deal.

Rohm & Haas' stock fell 16 percent yesterday to $53.34 a share. There's a so-called "ticking fee" that boosts Dow's price for Rohm & Haas by about $3 million a day - or 8 percent a year - after Jan. 10, 2009, according to the merger agreement contained in regulatory filings.

A Dow Chemical spokesman did not comment.

Rohm & Haas vice president Brian McPeak said he would not get into discussions of "what-ifs" regarding the Dow deal. "We are continuing to proceed with all the plans with the expectation of an early 2009 close," McPeak said. "All of the implementation planning is continuing unabated."

Rohm & Haas stockholders approved the deal in late October, and Dow Chemical and Rohm & Haas have announced new executive positions in the post-buyout company, signalling internally how important the deal is to both companies.

Pierre Brondeau, who rose through Rohm's electronics materials division, will run the Philadelphia-based division inside Dow Chemical, corporate regulatory filings show.

Chief executive Raj Gupta told company employees in an internal e-mail that he would retire when the transaction is done, The Inquirer reported in August.

John Haas, the patriarch of one of the founding families of the chemical company, has an office in the Rohm & Haas headquarters. He could not be reached for comment.

A Haas family representative approached Gupta in 2007 to say that the family wanted to diversify its assets out of the chemical company. The Haas family controls 32 percent of the chemical company's stock through trusts.

A plan to keep the company independent failed, and Rohm & Haas executives, with the help of Goldman Sachs & Co., auctioned the company to the highest bidder - Dow.

The blockbuster chemical merger, which was negotiated in sunnier economic times in the first half of 2008, is now running into the hard reality of plunging oil prices, a bank crisis and a severe recession. The original deal was signed in July, when oil prices were over $140 a barrel. They are now about $40 a barrel.

The plummeting price of oil was a key factor in Kuwait's ending the venture with Dow. In return for contributing businesses into the new joint venture company, the Kuwait officials were expected to pay Dow $7 billion to $9 billion in cash. Analysts believed this money was earmarked for the Rohm & Haas purchase, although Dow has said it could do the deal without the Kuwait money.

Dow Chemical has commitments from banks for a bridge loan. The size of those commitments could increase dramatically, now that Dow will miss the funds from the deal with Kuwait.