LESS THAN A MONTH after renegotiating a massive joint venture with Dow Chemical and signing a binding deal, the Kuwaiti government has changed its mind and canceled the agreement. The cancellation calls into question the viability of Dow's planned purchase of Rohm and Haas.
On Dec. 1, 2008, Dow and Kuwait's Petrochemical Industries Co. unveiled a reworked agreement for PIC to purchase half of Dow's commodity chemicals and plastics business. Instead of the $9.5 billion it was originally to pay, PIC would fork over $7.5 billion. In addition, upon completion of the deal, the new venture, which would have been called K-Dow, was to pay a $1.5 billion special dividend to each of the partners. The resulting proceeds for Dow would have been $9 billion, and PIC's net payment would have been $6 billion.
All of that is out the window now that Kuwait's Supreme Petroleum Council has canceled the merger.
"Dow is extremely disappointed with the decision by the Kuwaiti government and is in the process of evaluating its options pursuant to the joint-venture formation agreement," the company says in a statement. The merger contract caps damages at $2.5 billion in the event the deal doesn't close.
To Dow CEO Andrew N. Liveris, the transaction was as good as done less than a month ago. "The deal has closed in an economic environment that none of us have seen in our lifetime," he told analysts at the time (C&EN, Dec. 8, 2008, page 7).
Analysts are surprised by the cancellation and wonder whether Dow will now complete its $18.8 billion purchase of Rohm and Haas, since the cash from PIC was meant to help pay for that acquisition. The Kuwaiti decision is "a huge negative for Dow shareholders," Citi Investment Research stock analyst P. J. Juvekar wrote to clients. "Dow should be looking to protect its shareholders by cutting the Rohm and Haas deal at a lower price or walking away from the deal by paying a breakup fee." He notes that Hexion Specialty Chemicals walked away from its purchase of Huntsman Corp. by paying $1 billion.
According to its contract, Dow would owe Rohm and Haas a $750 million breakup fee if the merger is blocked by regulators or the agreement expires. In a statement, Rohm and Haas notes that the Kuwaiti transaction "is not a closing condition" for its merger with Dow and that it will work diligently to complete the deal.