Dow Moves Two Big Deals Along

IN THE FACE of tough economic conditions, Dow Chemical is moving ahead with the formation of its K-Dow Petrochemicals joint venture with Kuwait's Petrochemical Industries Co., but not before shaving $2.0 billion off PIC's bill. Dow says it is set to complete the deal at the end of the year and to finish buying Rohm and Haas in the first quarter of 2009.

Originally, PIC was set to fork over $9.5 billion for a 50% stake in Dow's petrochemical business. Now, it will pay Dow $7.5 billion. In addition, the newly formed K-Dow will pay each partner $1.5 billion. Thus, PIC's net payment will be $6.0 billion. Dow will rake in pretax revenues of $9.0 billion from the transaction. That's a decrease of only $500 million from what it would have gained from the deal's original terms. Dow says its after-tax proceeds will be about $7 billion.

"K-Dow closing in this way—where our pretax proceeds are on the order of magnitude not too far different than what we imagined prior to this economic meltdown—is a terrific win for us," Dow CEO Andrew N. Liveris told stock analysts on a conference call last week.

In addition, more businesses will be included in the joint venture. Under the memorandum of understanding the partners signed a year ago, Dow was to contribute its polyethylene, polypropylene, polycarbonate, ethyleneamines, and ethanolamines businesses to a 50-50 joint venture that would have generated about $11 billion in annual sales. Now, the two companies are also chipping in their existing MEGlobal ethylene glycol and Equipolymers polyethylene terephthalate joint ventures. The partnership's annual revenues are expected to be $15 billion.

As in the original terms, the deal includes Dow's existing ethylene cracker complexes in Canada, Argentina, and Spain. It doesn't, however, include the two Equate ethylene joint ventures between the two companies in Kuwait because they have minority partners. Liveris said the venture will study future projects in China, India, Vietnam, and Russia.

Liveris told stock analysts that he is proud he could fulfill his promise to complete the deal as scheduled. "When we said we would close K-Dow by year-end, no one anticipated the global meltdown that would occur in September and October," he said. "This deal was closed in an economic environment that none of us have seen in our lifetime."

Forming K-Dow is critical for Dow because the company needs the money to complete its $18.8 billion acquisition of specialty chemical giant Rohm and Haas. Liveris admitted on the conference call that, given the financial crisis, his two most-asked questions have been about the future of each deal.

Kevin W. McCarthy, a stock analyst with Banc of America Securities, pointed out in a report to clients that the Rohm and Haas purchase is a firm agreement, whereas the K-Dow deal had been, until last week, only a memorandum of understanding."There was brewing concern about the K-Dow deal—and by extension the Rohm and Haas deal—given dislocation of the markets," he wrote. Inking an agreement with PIC "allays concerns" that the Rohm and Haas deal would close without the K-Dow transaction, a scenario that would have strapped Dow with far more debt, he wrote.